US yields continued to head higher, but German yields edged down. European equities took modest losses mostly, though Greek markets lost 4% again. The rebound in oil prices lost more steam, and prices fell again clearly, with the Brent front contract slipping below USD 55. EUR/USD did not move much.
A joint statement between the Eurogroup and Greece was reportedly rejected by Greece at the last minute, and the talks broke down. The Eurogroup head Dijsselbloem sill characterized the meeting as useful and constructive, but what else could he really say. The talks will continue on Monday in a scheduled Eurogroup meeting. While an eventual compromise continues to be the most likely alternative, it will be very hard to reach an agreement yet on Monday either, which has more potential to cause bigger worries.
In Norway, Q4 mainland GDP was stronger than expected. But given the downward revision to previous quarters we view yesterday’s data as broadly in line with Norges Bank’s view.
Yesterday we updated our rates and FX forecasts for the Nordics, major economies and Emerging Markets.
Day ahead
With no deal on Greece struck yesterday, today’s summit of European Union leaders offers the chance of more high-level negotiations, but the more important negotiations will be on Monday. The bailout programme for Greece is set to end on 28 February. Unless it is extended, Greece will not receive a payment of EUR 7.2bn of bailout funds.
In the UK, the Bank of England’s Inflation Report will probably show a downward revision to the bank’s near-term inflation forecast, supporting our view that the first rate hike is still distant. We continue to look for lift-off in BoE rates in Q4 this year.
Today’s most important data release is the US retail sales report. As usual, our key focus is on the so-called control group, which filters into GDP and excludes autos, gasoline and building materials. We and the consensus are looking for a bounce-back in January after December’s weak core sales. Overall retail sales, however, are likely to fall again, dragged down by lower gasoline prices.
In Scandi markets, all eyes are on the Riksbank meeting, where roughly 25-30% probability of a 25 bp cut is priced in. Our Riksbank call is that the rate path will be flattened and include some probability of a rate cut in April/July, but that no rate cut or unconventional measures are delivered now. However, the tone will be very soft, signalling that the bank is ready to take action if necessary.
Rates
The German 10-year yield crept lower yesterday, ending the day 1.5 bp lower, but the daily range was rather narrow and trading volumes low. In the bigger picture, the yield has been moving largely sideways for the past week. It would be too soon to say that the bottoms have been reached, but at least yields have found tentative support.
After a couple of failed attempts, the US 10-year yield was finally able to close above 2% (though it has slipped below it again this morning). Yesterday’s 2 bp rise was the fifth consecutive daily climb. Levels above 2% are very much warranted considering that the Fed is preparing for its first rate hike.
Greek yields rose again yesterday (10-year yield up by some 35 bp), and Spanish and Italian bonds finally felt some pressure as well. Semi-core spreads, in turn, narrowed a tad. E.g. Spanish 10-year bond yield has now rebounded by almost 40 bp from last month’s lows, indicating some contagion from Greece as well as profit taking after a huge rally. The spread widening pressure on Spanish and Italian bonds is likely to continue in the near term.
Bond supply will continue today, with plenty of focus on longer maturities. The US will sell 30-year bonds, Italy bonds maturing in 2018, 2022 (a new bond) and 2030, while Ireland will offer a bond maturing in 2030.
The Danish central bank did not accept any of the bids in yesterday’s T-bill auction.
FX
The EUR/USD cross was barely changed yesterday, but market-implied volatility remains high amid uncertainty about the Fed and a Greek deal. Should today’s US retail sales disappoint, the USD will likely weaken on the news. However, bad news should keep volatility high and thus the USD bid going forward.
The SEK was among the weakest G10 currencies yesterday. It is not unusual to see the SEK weaken ahead of a Riksbank meeting. The SEK may gain today, as the market expectation of a cut (30% chance of 25 bp) may not materialise. Going forward, Fed repricing will matter more – notably, the SEK volatility remains higher than the seasonality would suggest at this time of the year.
The NOK depreciated yesterday, and even a stronger GDP report did not help. The market still prices in a rate cut from Norges Bank which, if oil prices pick up more, should not happen.
The GBP is likely to gain more. Even the downward revision of the inflation forecast from the BoE Inflation Report is not sufficient to change this: the underlying real wage growth trend should bring the pricing of the first BoE hike forward. The markets price in the first hike in Q1 2016, while we see it likely in Q4 2015.
Nordea