North Korea launching a ballistic missile yesterday has not in any way affected the markets. However, the 29 November Market Movers does reveal what traders & investors should focus on.
29 November, Danske Bank – Today is slightly more interesting than the past two days with inflation data out of Germany and Spain ahead of the euro inflation release tomorrow. In Europe, we also get consumer and business confidence indicators across countries today. In the US, the second estimate of GDP growth in Q3 is due out and the Fed is due to release its Beige Book.
Also in the US, Fed Chair Janet Yellen is due to appear before the Joint Economic Committee of Congress. However, given that markets have already priced in a December rate hike and Yellen is leaving the Fed soon, it is not really a market mover.
Danske Bank Research: 29 November Market Movers
In the UK, BoE Governor Mark Carney and the BoE’s Dave Ramsden are due to speak today.
In Sweden, the FSA is due to publish its Financial Stability Report, which is likely to mirror the message from the Riksbank’s report published recently. We will also get consumer confidence where we will look for signs of whether the recent development in the housing market is spilling over into confidence.
Highlights on US Economy
Fed Chair nominee Jerome Powell’s confirmation hearing yesterday supported the view that he will stick to Yellen’s monetary policy strategy by continuing the gradual hiking cycle and ‘quantitative tightening’ although admitting that there may still be more slack left in the labour market.
It was interesting that he was more vocal about his own target for the future level of the Fed’s balance sheet, which he thinks is between USD2,500 -3,000bn and should be reached within three to four years. In our view, this may be too optimistic, as we wrote in March earlier this year.
As expected, the US Senate Budget Committee passed the Senate tax bill yesterday, meaning that there can be a full Senate vote as soon as Thursday. This is likely to be a very complicated process, as the Republicans can only afford to lose two votes.
European Economic Outlook
Yesterday, The Telegraph wrote that EU and UK have agreed on the principle of the divorce bill, meaning that the UK is going to pay EU between EUR45-55bn after Brexit due to long-term liabilities, leading to a fall in EUR/GBP. Still, this may not be enough for the EU leaders to say there has been ‘sufficient progress’ in phase 1 of the negotiations (citizens’ rights, the divorce bill and Irish border) due to the increasing tension about the Ireland border
So, while the likelihood of a deal at the EU summit has increased, it is still not a given that the negotiations will move to phase 2 (future relationship). We still think it is still too early to price out Brexit risk premiums, as there are still many unresolved issues about what Brexit really means even if (when?) phase 1 is concluded.
We still see EUR/GBP within the 0.8650- 0.90 range in coming months with risks becoming more balanced. In the absence of any further positive news today, we could see EUR/GBP climbing back above 0.89 again.
Risk sentiment in global financial markets has been mixed overnight following the advance in the US tax bill and North Korea launching another test missile.
Norway. This morning, the Q3 wage figures are due to be published. As usual, the focus will be on manufacturing wage growth. However, this figure is being affected by the downturn in the oil sector, as some of those made redundant are finding new work in other manufacturing sectors on lower pay. This has the effect of pulling down average wages and so annual wage growth in the manufacturing sector. Outside the manufacturing sector, especially in some service sectors, wage growth has increased considerably since last summer.
Sweden. Q3 GDP is due to be released today and should reasonably be speaking strong. Recent worries about the housing market are unlikely to have affected the numbers at this stage. Our estimate is 0.6% q/q and 3.3% y/y. Also, NIER business and consumer confidence and the FSA’s Stability Report are being released.
Fixed income markets outlook
Finally, there will be some data in the calendar with German and Spanish inflation figures the main releases today. We expect a rebound in HICP inflation to 1.6% in Nov ember (released Thursday), due to a recovery in core inflation to 1.1% and higher energy price inflation (4.5% compared to 3.0% in October), driven by the recent increase in oil prices.
The ECB will release its Financial Stability Report today, which is set trigger some headlines. Benoit Coeuré said recently that more insights on the ECB’s assessment of the regulatory impact on the repo market including the Resolution Fund would be published in this report. This is in particular important ahead of the year-end squeeze.
With the German auction canceled, the Italian Tresoro will be the sole supplier in the EUR FI market today (and this week). The usual month-end tap in Italy will be smaller than usual as the tap in the 5Y is canceled due to reduced funding need and large cash position and will only consist of taps in the CCT Apr-25 and BTP Aug-27.
In the Scandi sphere, Swedish Q3 GDP is in focus. Our models suggest Q3 calendar-adjusted GDP continued the pace seen in previous quarters and we estimate 3.3% y/y, which is slightly higher than the 3.1% y/y recorded in Q2. Sweden will be tapping the 22s and the 32s today.
The Danish DMO is looking to sell the 01Mar18 T-bills and a new 6M bill (01 Jun 18) today. We have seen good demand for Scandi t-bills recently since the swap level works well into USD due to year-end. The deadline to submit bids is 10:15 CET.
29 November Markets Overview
EUR/USD edged slightly lower yesterday with little news to drive the cross as Jerome Powell’s confirmation hearing in the Senate as expected did not bring much news apart from suggesting the new Fed Chair will be a Yellen 2.0.
Today will bring a stream of eurozone confidence indicators as well as German inflation figures, which could be key to whether positive euro sentiment will hold up near term. There is set to be a range of Fed speakers this afternoon where we will be looking for more signs as to whether the FOMC is becoming hesitant on hikes due to a lack of inflation. We still think it is too early for the cross to break much higher and look for 1.2092 (8 Sep high) to hold on the upside. Key downside levels to watch are 1.1820 and 1.1773.
EUR/NOK has been range trading to start the week before tomorrow’s OPEC meeting, which is the highlight this week in the oil market. There seems to be a strong consensus in the market for a 9M extension of output cuts. In turn, this outcome should not move either the oil price or the NOK significantly. If anything, we see slight downside risk to Brent and upside risk to EUR/NOK around the meeting – see FX Strategy: OPEC meeting not a game-changer for NOK, 28 November 2017.
EUR/GBP dropped from 0.8980 to 0.8849 last night on the news that the UK and EU have agreed on the principle of the divorce bill, meaning that the UK is going to pay EUR45-55bn after Brexit. Some important issues remain unresolved such as citizens’ rights and the Irish border.
Thus, while yesterday’s progress in negotiations has increased the likelihood of a deal ahead of the upcoming EU Summit, it is still not given that negotiations will move to phase 2 (future relationship) due to a lack of progress. Expect GBP to remain very sensitive to Brexit related news in coming days as the UK still has until 4 December to make additional efforts to resolve differences.
As such, we do not see a case for a significant rally in GBP short term even if an agreement is reached with the EU as it is still too early to price out Brexit risk premiums, in our view.
We still see EUR/GBP within the 0.8650-0.90 range in coming months with risks becoming more balanced as improved prospects of a Brexit deal weighs against EUR/GBP supportive factors such as relative rates, growth, and the domestic political uncertainty in the UK. In the absence of any further positive news today, we could see EUR/GBP climbing back above 0.89 again.
29 November Market Movers Forecast
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