Market movers today
This morning we get July production data for Germany, Denmark and Norway at 08:00 CEST. Also keep an eye on Chinese trade data for August at 09:00 CEST.
Besides that, we get weekly notice data for Sweden and Sentix Investor Confidence for the euro area at 12:00 CEST.
We are looking forward to the ECB meeting on Thursday, although we do not expect any material changes to ECB’s stance, see ECB preview: Time for inaction, 4 September.
Brexit negotiations are set to continue today but there are no signs that there will be any breakthrough this week either (see news below).
US Congress returns and focus will be on negotiations on another COVID-19 relief package. A fiscal boost would be positive for the economic recovery as well as market sentiment. The Fed has entered its silent period and we will not get any news signals ahead of the FOMC meeting next week. Today, US is out for a holiday (Labour Day).
The 60 second overview
US labour market. The solid labour market report on Friday, which pointed to 1.4m job gains as well as a decrease in the unemployment rate to 8.4% (from 10.2%), is a signal that the US economy is improving albeit at a modest pace. In relation to its new AIT regime, the Fed will put less emphasis on labour market developments, but look towards inflation dynamics before changing its monetary policy stance.
Brexit. Late last night, the Financial Times ($) reported that the UK government considers passing an UK Internal Market Bill, which basically undermines the Withdrawal Agreement on areas including state aid and Northern Ireland customs (a nice summary of the story on Twitter here). As per usual, it is difficult to know how to interpret this, but one interpretation is that the UK tries to put the EU under pressure, as the negotiations are about to enter their final phase. The move has infuriated the EU, as it thinks it undermines negotiating in good faith ahead of the next negotiation round beginning tomorrow. PM Boris Johnson has also said that if there is no agreement at the time of the EU council meeting on 15-16 October, the UK will stop negotiating and prepare for no deal, see Sky News. The development late last night may weigh on the GBP today.
Geopolitics. During the weekend German foreign minister Heiko Maas said that he ‘doesn’t hope that the Russians don’t force us to change stance’ on the natural gas pipeline Nordstream two following the poisoning of Navalny in lack of Russian cooperation.
US election. This morning, we published our take on the upcoming US election. We expect Biden to win the election but remember that the US election is much more than just about the presidency. If the next President’s party does not win both the House and the Senate it is extremely difficult to pass new legislation. While the Democrats are clear favourites to win the House, the Senate is basically a coin flip right now. We expect the market reaction to be muted and that markets will react more to other things like COVID-19 development (including vaccine/treatment news) and Fed policy. For more details see Research US: Election dominated by Covid-19 and Fed policy, 7 September.
Equities. Equities had another tough day on Friday despite the solid labour market report, with major indices ending the day 0.8-1% lower, where tech stock again underperformed as it has in past days. Equity futures point to a mixed opening this morning.
FI. On Friday, we saw a significant curve steepening in the US. The 30Y Treasury yields rose 11bp, of which 9bp after the stronger-than-expected labour market report. The 10Y treasuries rose 8bp. European yields also recorded a sell-off but a very modest one. The European rates were somewhat detached from the US, with only 2-3bp sell-off in EGB space on Friday. Curves steepened as well.
The key theme heading into the autumn is whether the increased supply, Fed’s AIT decision and potentially inflation surprising on the upside can keep curves steepen, which seems consensus at this stage.
FX. Friday afternoon brought interesting price action in FX markets: the US fixed income sell-off post the non-farm payroll initially brought USD strength dragging EUR/USD below the 1.18 figure. Meanwhile, within a few hours the greenback had lost its gains and consequently EUR/USD ended the session roughly flat. Scandies were also little changed versus the EUR while the AUD, NZD and CAD were among the modest winners.
Credit. Another soft day in credit markets where iTraxx Xover widened (albeit only slightly) to 326 while Main ended in 53bp. Cash bonds have remained firm over the last few days and we expect them to continue to outperform CDS unless we are heading for a more prolonged period of price depreciation.
Nordic macro and markets
Sweden. SNDO budget numbers for August kick off this data-heavy week in Sweden, which includes information about economic activity in July, August inflation and the quarterly Prospera survey. Regarding today’s figures, we will see if borrowing needs continue to undershoot NDO forecast.