All eyes on US CPI this week

Market movers today

We start the week in a quiet fashion. The European Commission will release its new winter forecast and it will be interesting to see what they expect on the recession question and how fast inflation will slow down. Euro-area finance ministers also meet in Brussels to discuss energy markets and other topics.

Later this week the market highlight will be the US CPI print for January on Tuesday (read more in Research US - Soft landing to no landing?, 9 February). US retail sales will also give more input on the state of the US consumer.

The 60 second overview

US shoots down more objects: Another three objects have been shot down by the US air force following the shoot-down of the Chinese balloon a week ago. It is unclear where the objects come from and what they are exactly. They were not categorized as balloons. A US general Glen VanHerck said "I would be hesitant, and would urge you, not to attribute it to any specific country. We don't know". A State Department official last week said that Chinese President Xi Jinping may not have known about the Chinese balloon that flew into US airspace. In China, local authorities said they had spotted an unidentified flying object and were preparing to shoot it down.

Markets await US CPI: Markets in Asia are quiet, awaiting the important US CPI report tomorrow, which will be key for the next move in markets. On Friday, the University of Michigan consumer confidence report showed a rise in 1-year inflation expectations from 3.9% to 4.2% while 5-10 year inflation expectations stayed flat at 2.9%. Overall consumer confidence improved in a further sign that the headwinds for consumers and the overall economy seems to be easing.

Oil price higher: The oil price rose on Friday on the news that Russia plans to cut oil output 500kb/d in March and OPEC does not plan to increase output in response. Russia's oil production already dropped more than 1mb/d, or 10%, since the war broke out and we do not want to overstate the impact of a further drop. Buyers have shun Russian oil amid Russia's invasion of Ukraine and sanctions and forcing Russia to cut output. The additional drop in production in March may be involuntary. In the meantime, other producers have stepped in to reap market shares from Russia - mainly producers in Latin America. Finally, if the oil market tightens, i.e. and oil price rise above USD100/bbl, we expect OPEC+ to respond and hike output.

FI: European rates sold off from the opening by 5bp in core countries in the 10y point, but then range traded through most of the day. The entire yield curve ended higher, but the very front end rose the most, where ECB peak policy hike was 6bp higher on the day at 3.50% (€STR). 2y German Schatz reached 2.77% which is the since 2008. Banks chose to repay EUR36.6bn in ECB's voluntary TLTRO repayment option, which was a non-event for markets. Focus this week is clearly the US CPI print for January tomorrow, but otherwise this is a relatively quiet week. We also get the EC's new winter forecast.

FX: EUR/USD, currently back below 1.07, is expected to head lower over the coming months as global financial conditions re-tighten and this week's highlight in that regard could be tomorrow's US CPI report. The Riksbank sent EUR/SEK lower last week as they made a U-turn in terms of communication, and now the SEK seems to be back on the Riksbank's agenda. Short-term, this support should help EUR/SEK venture back towards the 11.00-region, which is fair according to our short-term model. The NOK was also supported by the Riksbank's shift, and last Thursday we entered a tactical short position in EUR/NOK. This Thursday's expectations survey from Norges Bank might be of interest near-term.

Credit: The credit markets ended last week on a rather negative note. During Friday, iTraxx Main widened 3.5bp to 78.7bp while iTraxx Crossover widened 16.9bp to 410.4bp. The weakness in the CDS market was also visible in the cash bond market, where secondary bond trading saw more balanced axes. Primary markets remained most of the week very active with a high issuance pace of both investment grade and high-yield rated instruments.

Nordic macro

There are no key movers in the Nordics today. Later this week we get Swedish house prices from Valueguard and unemployment while Norway releases the Q1 expectations survey and GDP for Q1. Governor of Norges Bank, Ida Wolden Bache, will also hold the annual address.