The ECB and Danmarks Nationalbank take centre stage

Market movers today

We expect a 75bp hike from the ECB today, which is also fully priced in by markets. Focus will be on communication and we expect Lagarde to acknowledge that the risk of the downside scenario from September materialising has increased.

We think it is a 70/30 call if Danmarks Nationalbank (DN) will decide to hike policy rates by 10bp less than the ECB (i.e. by 65bp) as a response to recent DKK strength and FX intervention selling. Markets seem 50/50 evenly split. Either way, we look for a small reaction in EUR/DKK following the rate announcement at 17:00 CEST.

In Sweden the monthly NIER survey is likely to show a further decline in confidence with special emphasis on manufacturing as Swedish PMIs show declining new orders. That said, we also have an eye on record-high retail trade price expectations to see if they are starting to budge. Consumers' perception of the risk of being unemployed and business hiring expectations are also in focus.

We see upside risks to our forecast for the US Q3 GDP of 1.1% q/q AR, as the recent sharp decline in imports could have boosted net exports more than anticipated.

Early Friday morning, we expect the Bank of Japan (BoJ) will keep its yield curve control firmly in place despite gaining pressures on yields and the yen. Until wage growth increases and boosts consumers purchasing power, BoJ will not loosen its grip on the yield curve willingly.

The 60 second overview

Bank of Canada: Yesterday the Canadian central bank surprised markets by delivering only a 50bp rate hike vs expectations of a 75bp increase in policy rates. While BoC clearly stated an expectation that further rate hikes are required the rhetoric surrounding the balance of risk to inflation was more balanced. Like many other central banks BoC increasingly face the trade-off between fighting high and persistent inflation by tightening policy and on the other hand the risk of overtightening amid leading indicators showing a clear downward momentum to growth prospects. 2Y CAD swap rates are down roughly 20bp since the announcement.

The pivot trade: the big focus point for markets has over the last week been the narrative that central banks globally are about to slow the pace of rate hikes. It started with a Wall Street Journal article last Friday presumably reflecting insider-intel that the Fed is contemplating delivering only a 50bp hike in December. This week speculations have only been fuelled further by weak economic data and Bank of Canada's decision yesterday to hike policy rates 'only' by 50bp. This has contributed to sending real rates lower and lifting equity markets although the technology sector specifically has suffered from a few prominent earning reports disappointing. The USD is on track for one of its worst weeks and broader commodity indices have rebounded.

From our chair it is important to stress that a slower pace of rate hikes - all else equal - still entails tightening of financial conditions. We do not share the view that a slower pace of rate hikes is a strong signal that we also approach the time when central banks are about to outright cut policy rates. Higher short-end inflation expectations since Friday in our view illustrate that it is still too early for central banks to shift policy stance albeit we understand the case for smoothening the last rate hikes in the cycle.

Equities: Global equities were lower yesterday dragged down by the US and tech. European and Asian markets were higher. The big difference yesterday was driven by earnings; half of the sectors sharply higher and half of them sharply lower. Taking for instance the S&P500 yesterday, cyclicals were down by 1.77% while defensives were up by 0.94%. Again not a macro-driven but an earnings-driven difference. VIX was also lower and small cap outperforming which is quite seldom to see on days with huge cyclical underperformance. In US, Dow +0.01%, S&P 500 -0.7%, Nasdaq -2.0% and Russell 2000 +0.5%. Asian markets are mixed this morning but the three tech-heavy markets, South Korea, Taiwan and Hong Kong are all higher. European futures are lower while US futures are up roughly 0.5%.

FI: Yesterday was primarily a wait-and-see session ahead of today's ECB meeting. However, the BoC surprise hike of only 50bp vs. 75bp consensus sent global yields lower. European rates ended lower across the board led by the 10y point down by around 5bp.

FX: Bank of Canada 'made an RBA', i.e., under-delivered vs expectations and CAD weakened in line with lower money market rates. Slight yet short-lived support to risk after the decision, while EUR/USD continued to edge higher. Monetary policy decisions and guidance from the ECB today and Fed on Wednesday will be crucial for how EUR/USD, which has parked above parity, and the Scandies will trade for the coming weeks.  

Credit: Credit markets had their 3rd risk-on day in a row on Wednesday, as risky assets continued rallying on a more dovish outlook for rates. Itrax main tightened 2.8bp to close at 113.6bp, while Itrax Xover tightened 12.3bp to close at 553.3bp. Primary markets also saw decent activity with among others, the Irish utility ESB, printing a 9.5 year EUR benchmark at MS+110bp (30bp tighter compared to the IPT).

Nordic macro

At 09.30 CET, the Debt Office releases its new macro/funding forecast. We expect an upward revision of the 2022 surplus and a downward revision for 2023. There are several uncertainties such as how the rising electricity capacity fees from Svenska Kraftnät (the grid operator) is treated in connection to how these are expected to be recirculated back to firms and consumers via compensation schemes to be decided by the new Government. In addition, there is great uncertainty about the impact from Riksbank tightening on the budget via QE losses (requiring a capital injection), higher cost for interest rate deduction and higher short rates having a negative impact on the tax account (outflows). Finally, slashing the growth outlook should imply automatic stabilizers are expected to work, pushing the budget in a negative direction. Funding likely to be adjusted via short-dated instruments and foreign funding as long as the outlook is clouded.