Bond markets rally

Market movers today

We have more central bank meetings on the menu today. We expect Norges Bank to leave rates unchanged at 4.25%. All eyes will instead be on what signals the bank puts out about its December meeting. See RTM Norway - Norges Bank on hold; to keep a data-dependent tightening bias, 27 October.

We also expect no changes from the Bank of England. We see them sticking to their guidance emphasising the "higher for longer" approach, like the ECB. See Bank of England Preview - Soft data warrants the BoE to stay on hold, 27 October.

On the data front, we will look out for the German unemployment rate, which has been climbing slowly higher this year.

In the US, we will keep an eye on Q3 unit labour cost data to gauge cost pressures at a business level. We also get initial jobless claims.

In Denmark, FX reserve figures are released by Nationalbanken. We do not think they have been active in the market in October, as EUR/DKK has traded quite close to the central rate.

The 60 second overview

Fed on hold. The FOMC decided, as expected, to keep the Fed Funds target range unchanged at 5.25-5.50% at yesterday's meeting. Powell struck a rather balanced tone at the press conference, emphasising that the FOMC sees progress but is not yet convinced that financial conditions are sufficiently restrictive. The FOMC is closely following the move up in long rates, though the impact of growth remains to be seen. Looking ahead, December is still 'live', though Powell hinted that the September median expectation of one more hike this year could be less accurate today. US inflation has moderated, but, as Powell put it, 'a few months of good data is only the beginning of the Fed building confidence that inflation is moving sustainably down'. We stick to our call that the last rate hike was delivered in July. The Fed signaled no plans to make changes to QT, which we expect to run at least into late 2024 and in any case well past the first rate cut. See US Research - Fed review: Still on Track, 1 November.

Bond markets rally. Several additional factors provided tailwinds to bonds yesterday. The US Quarterly Refunding Statement showed that the US Treasury expects to slow the pace of issuance in the long end of the curve in December and January. Additionally, total issuance at next week's refunding auction will be slightly smaller than expected at USD112bn. The decline in yields gained further traction in the afternoon following the release of significantly weaker than expected Manufacturing ISM figures for October. Labour market data was mixed with ADP lower than expected at 89.000 in October (consensus 150.000), while job openings remained elevated at ˜9.5mn in September.

Equities: Equities continued higher for a third day in a row. A lot of moving pieces but an unsurprising Fed meeting, weak macro data and lower Treasury borrowing than expected sent yields substantially lower and equities higher. As it was a yield driven session, cyclical growth and quality stocks were in favour, including big tech, consumer discretionary or real estate. The Nordic session was also a quality oriented one, but with a defensive tilt with especially health care at the top. This summarized to S&P 500 a full 1.1% higher, Stoxx 600 0.6% and small caps yet again underperforming. As yields are continuing lower this morning, US futures indicate another opening in green.

FI: EGB yields fell yesterday with USTs as US economic data surprised to the downside, Powell struck a dovish tone and the US Treasury issuance outlook was less bad than expected. 10Y Bund yields ended the day down 4bp, while the 10Y BTP-Bund spread tightened a few basis points. The 5Y5Y EUR Inflation Swap rate declined by 3bp to 2.47% - the lowest level seen since mid-June. 10Y UST yields ended the session down by 18bp.

FX: As per our expectations, Powell was interpreted as dovish by markets and US yields declined sharply. The USD gave back some of its gains from earlier in the session and EUR/USD ended up basically unchanged on the day. A rather uneventful day for Scandies whereas the JPY recovered some of the previously lost ground vs the USD. The GBP held steady in anticipation of today's BoE meeting.

Credit: Credit markets saw their fourth consecutive day of tightening, which has resulted in total tightening of 30bp for Xover, which currently trades at 430bp, and 6bp for Main, which is now at 83.6bp.

Nordic macro

We expect Norges Bank to stay on hold at 4.25% today. All eyes will be on what signals the bank puts out about its December meeting. Lower inflation numbers must be weighed against a weaker NOK, and Norges Bank must stress that risks are tilted to both sides and that the December decision obviously will be data-dependent.