feed the bond bears? Lund | Natalia Kornela Setlak ...Lund | Natalia Kornela Setlak | Tatiana...
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e-markets.nordea.com/article/43445/week-ahead-will-fed-feed-the-bond-bears 16 March 2018 Week Ahead: Will Fed feed the bond bears? Andreas Steno Larsen | Martin Enlund | Kjetil Olsen | Erik Johannes Bruce | Jan von Gerich | Torbjörn Isaksson | Jan Størup Nielsen | Anders Svendsen | Andreas Wallström | Amy Yuan Zhuang | Tuuli Koivu | Joachim Bernhardsen | Morten Lund | Natalia Kornela Setlak | Tatiana Evdokimova | Denis Davydov Is the stretched short bond positioning justified? Why Trumps personnel changes are USD positive Scandinavia: Rosy Norway, Lukewarm Sweden Read the report as pdf here. Read our financial forecast here. Is the market positioning for higher US inflation overdone short- term? Last week’s US wage-growth numbers did not show signs of acceleration, while this week’s core CPI remained at 1.8%. Two small setbacks for the very broad-based consensus that both wage growth and inflation risks are to the upside in the US this year. But the market remains stubbornly short in the bond positioning. The positioning is now as short as it was when the “Trump-trade” was at its hottest in late 2016 and early 2017. While there are fundamental good reasons for this short-positioning in US bond markets, it leaves an increased risk of a correction, when positioning becomes this stretched. If everyone already agrees that inflation and wages will pick-up, only small negative surprises to that narrative are needed to cause a correction. The stretched positioning is one of the reasons why we see limited upside to Fed pricing and 10yr treasury yields in the short-run - a correction lower could be on the cards.
Transcript of feed the bond bears? Lund | Natalia Kornela Setlak ...Lund | Natalia Kornela Setlak | Tatiana...
e-markets.nordea.com/article/43445/week-ahead-will-fed-feed-the-bond-bears
16 March 2018
Week Ahead: Will Fedfeed the bond bears?
Andreas Steno Larsen | Martin Enlund | Kjetil Olsen | Erik Johannes Bruce | Jan von Gerich | Torbjörn Isaksson | JanStørup Nielsen | Anders Svendsen | Andreas Wallström | Amy Yuan Zhuang | Tuuli Koivu | Joachim Bernhardsen | MortenLund | Natalia Kornela Setlak | Tatiana Evdokimova | Denis Davydov
Is the stretched short bond positioning justified?Why Trumps personnel changes are USD positiveScandinavia: Rosy Norway, Lukewarm Sweden
Read the report as pdf here.
Read our financial forecast here.
Is the market positioning for higher US inflation overdone short-term?
Last week’s US wage-growth numbers did not show signs of acceleration, while this week’s core CPIremained at 1.8%. Two small setbacks for the very broad-based consensus that both wage growth andinflation risks are to the upside in the US this year. But the market remains stubbornly short in the bondpositioning. The positioning is now as short as it was when the “Trump-trade” was at its hottest in late 2016and early 2017.
While there are fundamental good reasons for this short-positioning in US bond markets, it leavesan increased risk of a correction, when positioning becomes this stretched. If everyone already agreesthat inflation and wages will pick-up, only small negative surprises to that narrative are needed to cause acorrection. The stretched positioning is one of the reasons why we see limited upside to Fed pricing and 10yrtreasury yields in the short-run - a correction lower could be on the cards.
e-markets.nordea.com/article/43445/week-ahead-will-fed-feed-the-bond-bears
Chart 1 – Bond market positioning is super short-stretched:
Pompeo and Kudlow – A look into Trump’s most recentappointments
As Trump fired Rex Tillerson last week as secretary of state and replaced him with CIA director Mike Pompeo,the USD sold o. Pompeo is without a doubt less of a diplomat than Tillerson and will likely prove to be ahardliner towards both Iran and North Korea.
Turbulence around the personnel in the Trump administration is initially USD-negative (as was also evidentduring the Anthony Scaramucci farce last summer), but we don’t consider the hiring of Pompeo to be USD-negative, rather the opposite. The same story applies if H.R.McMaster is replaced with John Bolton as thenational security advisor, as is rumoured this morning.
The risk of geopolitical tensions increases with Pompeo (and Bolton) behind the steering wheel ofUS foreign politics – and we don’t rule out that markets will start to price in some sort of geopolitical riskpremium as a result of Pompeo’s (and potentially Bolton’s) appointment. This should in general be USDpositive.
In terms of the vacant post as chief economic advisor to the president (after Gary Cohn resigned), LarryKudlow has communicated that he has accepted the job. Kudlow seems like a less crazy choice than theanti-trade economist Peter Navarro, who probably orchestrated Trump’s steel-taris. Larry Kudlow wrote inhis column just last week that “taris are really just tax hikes”. The choice of Kudlow will therefore probablydampen trade war fears short term. But, if Trump opted for taris despite warnings from Gary Cohn, hecould of course also opt for further taris against the wish of Kudlow.
An important trade-war tracker going forward is the ratio between European auto-stocks versus the broaderindex. We have seen some relief for auto-makers in this ratio over the past week, but the market still partlyfears that auto-taris are next up for Trump.
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Chart 2 – European automakers vs. broad index. A ratio worth tracking in thetrade war:
The G10 surprise index continues to drop
The G10 surprise index continues to weaken, and we still look for a softening in various sentimentindicators, especially European ones as the adverse FX eects from a strong EUR will be a drag on surveys.The US manufacturing outlook will fare relatively well compared to the European, as was also evident thisweek with solid signs from the NY Empire Manufacturing index and Philly Fed Index.
Overall Q2 will likely bring further negative macro surprises, which is why better entry-levels for the“normalization bets” could be on the cards 1-3 months out.
Scandinavia: Rosy Norway, Lukewarm Sweden
The string of positive news continues to float of out of Norway at the moment, and Norges Bank took accountof the better outlook and raised the probability of a rate hike by the end of September 2018 to 100% in therate path on Thursday. The market pricing of Norges Bank is in line with a September hike, so Norges Bankwill now have to move in either June or August to surprise hawkishly compared to market expectations. Thepotential for hawkish surprises from Norges Bank have thus become smaller for now.
In Sweden, the inflation worries continue for the Riksbank as the CPIF index continues to print 0.2%-pointsbelow the Riksbank view. But the labour market oered very encouraging signs from Sweden last week –
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and could the dropping unemployment rate be the first sign that markets will soon be positively surprised bySwedish key figures again?
A lot of bad news has been priced into the Swedish outlook recently, and the Swedish surprise index hasplummeted. This usually doesn’t last forever – and the scope has increased for positive surprises to theSwedish outlook, despite the fact that the Riskbank’s inflation struggle will continue over 2018.
While we fundamentally still like the Norwegian outlook versus the Swedish outlook, we think that thecurrent market optimism surrounding Norway and pessimism surrounding Sweden is getting slightlystretched.
Chart 3 – Unemployment has continued to surprise on the low side of NorgesBanks expectations:
What is most important next week?
The FOMC meeting on Wednesday will be interesting, and, while a hike is a done deal, there is moreuncertainty surrounding the updated dot plot. Recently markets have front-run the possibility of a hike of theso-called R* - the longer-run interest rate in the dot plot. 5y1y rates have traded around 3.25% against Fed’slonger-run interest rate at 2.75%. This indicates that markets have already priced in a substantial risk of anupwards revision of the longer-run dot plot. Hence, if the Fed decides to postpone the longer-run dot plotrevision until June, it could be a slight dovish disappointment for the recent hawkish Fed bets.
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The market pricing of the Fed Funds rate is more or less exactly on par with the current dot plot for2018 (three hikes are priced). If Fed opts for four hikes in total this year in the dot plot (as we expect, threeon top of the hike on Wednesday), the market will have some catching up to do again.
Chart 4 - Will the new FOMC dot plot influence market pricing?
We continue to judge that European/German PMIs look vulnerable from the current high levels, andnext week will give us a string of new clues on whether that story holds. Judging from the financial marketdevelopments over the last month, the Composite Euro Area PMI (Thursday) could drop as much as 1 index-point again this month.
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Chart 5 - European PMI disappointments? Market developments indicatedownside risks:
From Italy we will get clues on how the new political landscape will be formed as the Parliament willreconvene on Friday, where the president of each of the two chambers will have to be elected. Next Sundayis the ultimate deadline to choose party aliation for all parliament members. The Five Start Movement hasalready expelled five elected members of parliament. Who will they chose to aliate with? Also we mightget new clues on the Brexit transition deal during the EU summit on Thursday and Friday.
In Scandinavia the most important key figure to watch is next Friday’s unemployment figure fromNorway. Will unemployment surprise on the low side of Norges Bank’s forecast again?
// Andreas Steno Larsen (Senior Strategist)
Key research pieces over the past week:
16/03 – Russian Central Bank preview: One step closer to neutrality
16/03 – Fed watch: tailwinds for dots
15/03 – Norges Bank review – First hike approaching
14/03–Swedish inflation February review: Riksbanks challenge remains
12/03–Euro-area inflation: Not so super core
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Table 1: Main releases to watch
Monday:
There are no major key figures today. Norwegian credit growth is due from the Nordics. Fed’s Bostic (voter,neutral/dove) will speak during the day.
Tuesday:
UK inflation numbers will take centre stage today. An outcome around 3% y/y should not be a surprise tothe Bank of England. The German ZEW index – a gauge of sentiment among financial analysts – could giveinsights into the impact of trade war fears on sentiment indicators in the near term.
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Wednesday
It’s Fed day. The Fed is likely to deliver its sixth rate hike in the current normalisation cycle. Much moreimportantly, we believe tone at tonight’s press conference will be perceived as hawkish, not least because weexpect the dot-plot to indicate four rate hikes this year. Norwegian unemployment is due from the Nordics,while the UK will publish labour market figures. Tonight the Brazilian Central Bank will keep its policy rate atrecord-lows.
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Thursday:
It’s a big day for the markets today. Not only will the European markets digest the messages from the Fed, butwe also get Euro-area PMIs, German Ifo and a monetary policy meeting at the Bank of England. We expectPMIs and the Ifo to level o further in response to a stronger EUR, higher interest rates, falling equities andgeneral trade woes. The BoE meeting in itself is not that likely to be eventful with no press conference andno new inflation report. The EU summit, which begins today, might on the other hand prove eventful whereinvestors will be looking for any clues regarding a possible Brexit transition deal. Lastly, Fed members Bostic(voter, neutral/dove) and Kashkari (non-voter, dove) will give speeches.
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Friday:
US durable goods orders, Norwegian unemployment and a meeting in the Central Bank of Russia are duetoday. On the political front, the Italian parliament reconvenes after the general election and the two-day EUsummit closes. Fed’s Rosengren (non-voter, hawk) will speak late in the night.
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Andreas Steno LarsenGlobal FX/FI [email protected]+45 55 46 72 29
Martin EnlundChief [email protected]
Kjetil OlsenChief [email protected]
Erik Johannes BruceChief [email protected]
Jan von GerichChief [email protected]+358 9 5300 5191
Torbjörn IsakssonChief [email protected]+46 8 407 91 01
Jan Størup NielsenChief [email protected]+4555471540
Anders SvendsenChief [email protected]+45 55467229
Andreas WallströmChief [email protected]+46 8 407 91 16
Amy Yuan ZhuangChief Asia [email protected]+65 6221 5926
Tuuli KoivuSenior [email protected]+358 9 5300 8073
Joachim [email protected]
Morten [email protected]+4533331726
Natalia Kornela [email protected]
Tatiana EvdokimovaChief [email protected]
Denis DavydovChief [email protected]
28.9.2017
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