Rates and the oil price barely moved yesterday while the S&P 500 went down 0.4%. The EUR fell to its lowest level in 11 years vs the USD. Chinese equity markets had to digest the lower GDP growth target of “around 7%” although this announcement has been widely expected. On the policy side, we expect interest rate liberalisation and another widening of the CNY trading band.
Yesterday Poland joined the ranks of now more than 20 central banks that have eased monetary policy so far this year. The 50 bp cut was more aggressive than expected. The end of the easing cycle has probably been reached. Brazil hiked rates by 50 bp as expected.
Growth in the Euro area is strengthening, with a good kind of deflation helping. In January, retail sales recorded their strongest increase since 2005. Euro-area PMIs are compatible with GDP growth of 0.3% q/q in Q1. We currently pencil in 0.4%.
Day ahead
From today’s ECB meeting (in Nicosia) we don’t expect any changes to the policy rates or to ongoing or upcoming programmes. A few more QE details including the starting date can be expected. If we are lucky, the ECB will publish a list of agencies eligible for QE purchases. This has the potential to cause spread movements in the agency space, but not more generally. The overall market response should be rather muted this time. The ECB will also present new staff projections against the backdrop of better macro numbers.
From the US, we get factory orders, jobless claims as well as revised productivity numbers – but that’s not more than an appetiser ahead of the jobs report tomorrow.
Norway will publish the Q1 oil investment survey, the first survey fully reflecting the weaker oil price. We believe it will indicate a drop by 20% in 2015 while Norges Bank’s forecast is -15%.
Rates
Euro-zone core/semi-core 10-year yields were range bound (+/- 0.5 bp), which should come as no surprise the day before an ECB Governing Council meeting concerning monetary policy. The most notable countries were Spain and Portugal whose yields fell by (2 to 4 bp.
US yields fell (2 bp) yesterday, erasing the loss from the day before. The spread between the US 10-year yield and the equivalent EUR yield is already at a 25-year high, and after the ECB meeting it could very well go higher.
FX
The USD strengthened yesterday on a broad basis despite a lack of distinct macro drivers. The broad dollar index DXY is testing the 50% retracement level from the 2002-2008 move. A monthly close above could pave the way for another substantial leg of dollar strength. Today’s main event is the ECB press conference which should provide more details on the imminent QE programme. ECB QE is thought to provide appreciation pressures on other currencies. That said, since we’ve written about ECB QE since August, a lot should be priced in by now.
The SEK has seen a marked repricing recently, helped by strong data as well as confusing krona remarks from the Riksbank. The market is currently underpricing the risk of further Riksbank stimulus moves, we think. The EUR/SEK cross has thus dropped too much, too quickly based on our reading of the Riksbank tea leaves. Consider establishing EUR/SEK longs around recent lows (9.21).
The NOK weakened yesterday. The market is nervous ahead of the oil investment survey today and the regional network survey tomorrow. Our call for a 20% drop in oil investments could add to the pressure on the NOK in the short term.