Fed to signal a March hike

Market movers today

Today's highlight will be the FOMC meeting. We expect Fed to keep policy rates unchanged, but reinforce signals for a March hike. As it is one of the interim meetings, no updated projections on the 'dots' will be released. We now expect four 25bp rate hikes this year and QT starting in September, with risks skewed towards more hikes and earlier QT (see also Fed Research - Preview: End of money printing brrrrr - (at least) four 25bp rate hikes this year and QT in September, 18 January).

Bank of Canada (BoC) was one of the first G10 central banks to turn in a more hawkish direction last year. While its latest guidance for the first-rate hike has been for the "middle quarters of 2022" there is a real likelihood that BoC will hike policy rates today by 25bp. Analysts are almost evenly divided on the call while markets are leaning slightly towards a hike. As recent data supports the need for policy tightening we would not be surprised to see a hike today even if our base case (based on BoC's guidance) is for unchanged policy rates.

Developments in the Russia-Ukraine dispute will remain the key focus in Europe, amid a light data calendar.

Danish retail sales figures for December could show a slight downturn in the month according to our Spending Monitor. In Sweden, we keep an eye on the extraordinary meeting of the Financial Stability Council in light of the tense security situation in Europe.

The 60 second overview

Risk-off: Markets remain in a risk-off mode with Asian markets mostly in the red on Wednesday morning. The option-based volatility measure, VIX index, rose to one-year highs yesterday, and S&P500 is almost 9% below the year-end levels.

IMF growth downgrade: Yesterday, the IMF cut its global growth forecast to 4.4% in 2022 from 4.9% in October. US growth is now projected at 4% this year, compared to 5.2% earlier, due to the stalling of the Build Back Better plan, faster-than-expected unwinding of monetary stimulus and continued supply-side shortages. China's growth outlook for this year was also cut by 0.8% to 4.8% due to negative impacts from the zero-covid policy and protracted stress in the property market. The IMF projections assume that negative health effects from the pandemic will gradually fade towards the end of this year globally but they see risks to the downside, as low vaccination rates across many developing economies continue to pose a threat of new variants emerging.

Russia-Ukraine standoff: Tensions keep building up as Russia awaits for a written proposal from the US/NATO regarding their security guarantees. Meanwhile, the US and the EU struggle to find common ground on new sanctions in the case that Russia launches an attack. Several options have been laid on the table. The US administration has been reported to consider sanctions targeting Russian individuals and financial institutions, export bans (e.g. chips and military-related technology), and punishing Nord Stream 2 operators. The EU seems less hawkish than the US, and also remains divided in their stance with regards to a bloc-wide response. The likelihood of removing Russia from SWIFT seems somewhat lower than in early January, as particularly Germany has appeared very reluctant to consider any sanctions that would stop gas imports from Russia. We think the West would abstain from the most extreme sanctions even if there is a military escalation, as long as any new conflict would be contained in size and scope. But in the unlikely event of a large-scale Russian attack and a full-blown war, the West's response could be harsh.

Equities: The rebound proved to be short-lived, with US markets dipping back to red on Tuesday. Growth lagged again as yields picked up, with semis, MedTech and tech selling off further. S&P 500 -1.2%, Dow -0.2%, Nasdaq -2.3% and Russell -1.5%. Asian markets are somewhat directionless this morning, and US futures have turned slightly positive.

FI: The long-end underperformance yesterday was noticeable with the Dutch 2052 supply as well as the French 2052 linker. Furthermore, Finland mandating banks for a long 20y resulted in additional underperformance of the long end RFGB curve versus peers. Benchmark spreads in the 10y segment were broadly stable for the core and semi-core while the peripheral spreads to Bunds tightened some 2bp - with no outcome of the Italian presidential election yet as widely expected.

FX: Fed will likely remain hawkish until commodities roll over. EUR weakness is here to stay and we see EUR/USD at 1.08 in 12M. Growth downgrades by IMF are in line with wobbly markets. RUB has tentatively stabilized after having returned to anchor.

Credit: CDS indices followed European equities in green, but cash bonds continued to sell off yesterday. iTraxx Xover tightened 4.3bp and Main almost 1bp while HY bonds widened 5bp and IG 1.5bp.

Nordic macro

In Sweden, Max Elger, Minister for Financial Markets, has called an extraordinary meeting of the Financial Stability Council (09:00 CET) in light of the tense security situation in Europe and the risk of effects on the functioning of the financial markets. FSA's Erik Thedéen, Stefan Ingves, SNDO's Hans Lindblad will participate. The data calendar is light with PPI and trade balance numbers for December.