Today’s focus for Investors is the FOMC meeting. It is one of the big meetings where we get updated projections and ‘dots. Check out the Danske Bank Danske Bank Research: 13 December Market Movers overview for the in-depth analysis of the market.
13 December, Danske Bank – Today’s main event is the FOMC meeting. It is one of the big meetings where we get updated projections and ‘dots’. In line with consensus, we expect the Fed to raise the target range to 1.25-1.50%, which by itself should not have a great market impact. What is more important is the updated ‘dots’, but we expect the FOMC to still signal three hikes in 2018. For more details, see our FOMC Preview – Third hike and unchanged dot signals.
Danske Bank Research: 13 December Market Movers
In the US, CPI numbers for November are due. We estimate CPI core rose 0.2% m/m (1.7%y/y versus 1.8% y/y in October). In our view, it is likely that headline inflation increased significantly more given the large increases in fuel prices and we estimate an increase of 0.4% m/m in November (2.2% y/y versus 2.0% y/y in October).
- In the UK, the labour market report for October is due to be released, where we expect a further drop in the unemployment rate to 4.2%. It is likely to be accompanied by continued modest growth in average weekly earnings of 2.2% y/y, meaning that real wage growth will continue to be negative.
- Also in the US, President Trump is expected to deliver a speech on US tax reform.
- In Germany, party leaders from SPD and CDU/CSU will meet today for first exploratory talks about a possible governing coalition.
- In the UK, discussions on the government’s EU withdrawal bill, which repeals the European Communities Act 1972, continues today. The opposition and Conservative rebels want a meaningful vote in Parliament on the final Brexit deal and PM Theresa May might have to give some concessions here.
- In Sweden, Prospera is due to release its quarterly inflation expectations survey this morning.
Selected market news
In the US, Doug Jones (Democrat) won the Alabama special Senate election over Roy Moore in an otherwise safe Republican state. This reduces the Republican’s already a slim majority to 51-49 (from 52-48) amid tax reform negotiations. It is difficult to extract much information from the election given the child molestation allegations against Moore.
Trump took the defeat well and tweeted congratulations to Jones, perhaps since a Moore victory would also have put the Republican party in a bad situation, as many Republicans wanted nothing to do with Moore (also note that Trump initially supported another Republican candidate). Doug Jones will take office no later than 3 January and until he does so, the Republicans still have a 52-48 majority. Markets think on the margin this means tax reform has become a bit more unlikely by sending USD lower, S&P500 futures down and US 10Y yields lower.
In Sweden, Prospera releases the ‘big’ quarterly inflation expectations survey. The previous one in September showed no change in the upward trend. However, this time might be different. The smaller monthly money market survey showed a drop in November on the 1Y and 5Y horizons. A decline in the big survey would add to Riksbank’s woes although inflation surprised on the upside yesterday with CPIF now being back at the 2.0% target – something we expect to be short-lived.
The next focal points are now the house price data tomorrow and the Riksbank meeting on Wednesday next week.
Fixed income markets outlook
The FOMC is the main event today and it is a ‘big meeting’ in the sense that we will get new ‘dots’, see FOMC preview. CPI inflation data for November is also due today.
In Denmark, we expect the DMO to announce the funding target for 2018 at the end of this week or more likely next week. We expect the issuance target for DGBs to be raised by DKK15bn to DKK80bn in 2018. We assume that around half of the increased financing requirement due to social housing funding of DKK42.5bn will be met by drawing on the government account. Denmark’s DMO may decide to announce a new 30Y DGB or a new 10Y linker alongside the increased issuance requirement, see research note.
13 December Forex markets Overview
We do not think the Fed will move the USD much with a hike today, albeit the knee-jerk reaction could be for a slightly lower EUR/USD if the dots remain unchanged. But, we stress that there is a clear risk that this could be received by the market as a ‘dovish hike’, not least if the dots are taken lower and/or the CPI release (out ahead of the decision) add to the recent worries the Fed has voiced over the lack of a sustained pick-up in wage/price pressure.
We still see EUR/USD staying roughly within the 1.16-1.20 range ahead of year-end, and stress that widening in basis remains a key near-term source of downside risks.
13 December Market Movers Forecast
In the Scandies, it’s time for a status after the two November inflation prints. Two surprises in two days: one negative on Monday (Norway) and one positive yesterday (Sweden). EUR/NOK surged more than 10 figures, EUR/SEK dropped almost 10 figures upon release. As the dust settles, NOK/SEK is now down from 1.02 yesterday. Meanwhile, none of the two inflation prints are likely to affect the monetary policy decisions from Norges Bank and the Riksbank in December: we still expect the former to raise its rate path, whereas the latter is expected to terminate QE and leave its rate path intact.
We expect NB to raise rates within a year, while the Riksbank is expected to stay on hold beyond next year. Apart from current rate decisions, the focus is on the housing market in both countries, where our model suggests Swedish Valueguard will drop another 4.3% in November (data on Thursday). We think the Swedish housing market is more vulnerable to a correction with eventual repercussions on the economy and the Riksbank compared to Norway. The Riksbank has priced too aggressively while Norges Bank too modestly in our view. We think the drop in NOK/SEK is getting overdone, and prefer to start building long positions. We are long NOK/SEK in our FX Top Trades 2018, 6 December 2017.
Keys figures and event
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