Equities rose a tad in the US yesterday and are slightly up in Asia overnight. Bond yields were up on both sides of the Atlantics, while oil prices (Brent) held on to a level just above 60 USD/brl, and the EUR strengthened a bit against the USD.
The BoJ kept rates unchanged. Governor Kuroda is speaking after the editorial deadline of this report, but is likely to remain fairly positive on growth and inflation.
Swedish inflation came out very much in line with forecasts in January. The CPIF stood at 0.6% y/y, which was spot on our call and just a tad higher than the Riksbank’s forecast (0.54%). We still expect the Riksbank to take further action in April, though.
Day ahead
Big central banks will be in focus today with the release of minutes from the Fed and the Bank of England. The ECB will review the ELA facility for Greece and is likely to increase the pressure even more.
Minutes of the 27-28 January FOMC meeting are expected to signal that the Fed still sees a first rate hike around mid-2015. However, the minutes are unlikely to clearly indicate whether mid-year means June or September. The most interesting part of the minutes will likely be the discussion of the key phrase in the post-meeting statement that the FOMC can be “patient” in beginning to normalise monetary policy. The reference to patience indicates that the Fed is unlikely to begin raising rates for “at least the next couple of meetings”. Note that the January FOMC meeting took place prior to the release of the recent blockbuster jobs report.
The minutes of the 4-5 February MPC meeting at the Bank of England are likely to show a unanimous vote for unchanged rates. We believe the inflation outlook will remain in focus with particular interest on how the members see the effects of the sharp drop in oil prices and wage growth. Inflation dropped to 0.3% y/y in January in line with expectations, but this was the lowest reading since March 1960! Also today’s labour market data will be closely watched to see how pay growth is developing. Any signs of wage growth faltering could fuel speculation that the next move in UK interest rates may even be a cut.
Rates
The German 10-year yield saw some ups and downs yesterday, but finally ended the day a bit higher. Greek developments will contribute to uncertainty in the near future, but the improving Euro-area economic data flow should put modest upward pressure on German yields. No bigger rises are in sight, though.
Greek yields understandably rose, but receded from intraday highs, while intra-Euro-area spreads generally narrowed. The spill-over effects from Greece were thus very weak. Real Grexit fears, on the other hand, would have bigger effects.
The US 10-year yield opened lower after Monday’s holiday, but climbed higher during the day. Yesterday’s move follows two weeks of higher yields, and a stabilisation of yields above 2% would imply that the recent rise has been more than just a temporary rebound.Today’s Fed minutes have the potential to put more upward pressure on yields.
In bond supply, Germany will reopen its 10-year benchmark for EUR 4bn.
FX
The EUR gained yesterday, helped by better sentiment data in the form of the ZEW index while US data on the whole disappointed once more. The US economic surprise index is the worst in the G10 FX space after the worst start to any year since 2008. This has helped put a damper on the strengthening trend of the USD. The market is struggling to decide what matters: on the one hand, an improving Euro-area outlook suggests some growth convergence (EUR-positive) while on the other hand, the theme of monetary policy divergence remains on track (USD-positive). In the near term EUR/USD is likely to remain stuck between a rock and a hard place (1.13-1.15). The news flow surrounding Greece will cause volatility in the near term, while the above-mentioned tensions should be resolved in the direction of a stronger USD later on.
SEK: January inflation actually topped expectations a touch, helped by effects from a weaker krona. Today, inflation expectations among money market participants may rebound a touch, even though it won’t be a game-changer for the Riksbank. The next quarterly inflation expectations survey (11 March) will be key for the SEK ahead of the Riksbank meeting in April. Given the clear and present danger of further Riksbank easing, the SEK is a sell on rallies in the short term.
NOK: The currency weakened a tad yesterday as oil prices came under pressure once again. If the market tries to push the NOK stronger from these levels, it risks running afoul of Norges Bank, which isn’t very much interested in a “stronger-than-expected” currency. Previous 2015 EUR/NOK lows (8.53-8.55) may provide some resistance.
Nordea