ECB interpreted as being 'dovish' despite 75bp hike

Market movers today

Today we get the first Q3 GDP figures out of the big euro area economies. Consensus sees slowing but still positive growth in France and Spain. We expect Q3 will mark the start of at least a technical recession in Germany with a GDP decline of 0.3%.

We also get German inflation figures for October. Here we expect to see CPI inflation around last month's 10.0% level as a VAT reduction on natural gas kicks in but core inflation will likely edge higher.

We expect an unchanged high mom 0.6% increase in the US PCE core index, which leaves core inflation at 5.3% in September, up from 4.9% in August.

We also get flash GDP indicator out of Sweden and jobless rate and retail sales from Norway, see more below.

The 60 second overview

ECB: At yesterday's meeting, the ECB decided to hike all policy rates by 75bp and importantly sent signals that it is slowing the hiking pace. Lagarde emphasised the data dependency, and the meeting-by-meeting approach. There was no discussion about ending the QE reinvestment policy.

Rates markets lowered the ECB's expectations for further rate hikes by around 25bp yesterday. Markets are now pricing 57bp for the December meeting and a peak in the ECB deposit rate to around 2.6%. 10Y yields in Germany and Italy fell 15bp and 32bp, respectively. We expect a 50bp rate hike at the December meeting.

The ECB also announced changes to the TLTRO terms. The latter is set to cause a significant drop in excess liquidity already from 23 November. For more on the ECB meeting, see Flash: ECB review that we published yesterday.

Danmarks Nationalbank (DN) hiked its key policy rate by 60bp to 1.25% (15bp less than the ECB). The smaller rate hike should be seen in light of the recent large scale FX intervention selling of DKK. The spread to ECB's key policy rate is now -0.25%, which we think will be enough to weaken DKK and end the need for further FX intervention. Hence, going forward DN is expected to mirror ECB one-by-one. For more see Flash comment Denmark that we published yesterday. 

US GDP: US Q3 Flash GDP rose more than expected by 2.6% q/q AR (consensus +2.4%). The strong headline figure masked weakness in the underlying growth, as it was supported by +2.8%-point contribution from net exports, mostly reflecting declining imports. Private consumption growth slowed to only 1.4% q/q AR despite the recovery in real purchasing power, which provided modest support for the recent market speculation of an earlier Fed pivot. Nevertheless, we still think Fed is likely to stick to hawkish narrative in the next week's meeting, read more in our Fed preview that we published this morning.

FI: European rates sent yields markedly lower on a dovish interpretation of the ECB meeting and was led by the short end of the curve. Italian bonds led the outperformance of peripheral bonds to Bunds as the Italian-German spread narrowed 17bp yesterday, in response to the fact that no reinvestment policy discussed yesterday.

FX: While ECB delivered 75bp, markets concluded it was a dovish hike as indicated by substantial repricing of shorter rates. In FX there was broad EUR weakness including some downside in EUR/SEK but, in particular, EUR/NOK - NOK/SEK closer to October highs just below 1.07. DXY has lost 5% over five trading days but now seems to find ground at the 110 support area. Focus in FX will now shift to the Fed on Wednesday.

Credit: Credit markets were relatively muted on Thursday on the back of mixed economic data and weakness in select sectors of the economy. Itrax main was basically flat (+0.4bp) ending the day at 113.3bp. Itrax Xover tightened 4.6bp to end at 552.6bp.

Nordic macro

Sweden: The (flash) GDP indicator for Q3 is released today. If m/m growth in September remains flat, this will take the quarterly figure to -0.4% (q/q), in line with our GDP forecast from Nordic Outlook. However, the monthly figures are notoriously volatile and thus hard to pinpoint, but given current outlook for Swedish consumers we believe that risks are tilted to the downside.

Norway: We expect the jobless rate to climb to 1.7% in October, and we will also be keeping an eye on job openings to see if the downward trend there continues. Retail sales rebounded slightly in August after the sharp fall in July, but without breaking the downward trend. Strong inflation, higher interest rates and the shift from goods to services following the pandemic will probably continue to undermine retail sales in the coming months. We therefore expect them to fall 0.5% m/m in September.