Hawkish FOMC comments and Norges Bank hike

Fundamental analysis of Forex market

Market movers today

It will be a very quiet day on the data front today with only UK retail sales and German PPI of interest.

The 60 second overview

Norway: Norges Bank (NB) goes ‘front-loaded’ and hiked rates by 50bp. As expected, NB hiked rates by 50bp to 1.75%. This was widely expected after the 4.5% core-inflation print for July, despite the ‘promise’ to hike by 25bp at the time of the June monetary policy meeting. In the press statement, the committee stated that: “Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in September”. Importantly – contrary to the June meeting – NB stopped short of sending a clear signal about the size of the likely September hike. This was one of the small meetings without a new Monetary Policy Report (MPR) and rate path.

Several FOMC members were on the wires yesterday all signalling that they are not close to ending the tightening process. Daly and Bulland favoured a 75bp hike in September. Kashkari said that it isn’t certain that inflation could be back at target without a recession. ECB’s Schnabel sent similar signals and while she did not rule out a technical recession she was not sure that recession would tame inflation itself, hence further policy tighten should be expected.

Euro area inflation was confirmed at 8.9% for July. Early signs of various underlying inflation measures point to a flattening out of the inflation pressure, however with the surging electricity and energy prices headline inflation will increase and stay elevated in Q4 and well into next year which will pose a challenging balancing act for the ECB in the period ahead.

In Germany, the government announced that the VAT on gas will be lowered to 7% from 19% until March 2024 in its most recent attempt to shield consumers from the implications of the energy crisis.

The Turkish central bank cut rates yesterday by 1pp despite recording almost 70% inflation rate.

Equities: Equities finished slightly higher yesterday but without a clear direction and very limited sector and style rotations. Energy, the prime outperformer as oil priced ticked higher while second best performer was technology. Perhaps most interestingly, vol measures by the VIX index softened further to 19.5 and thereby came below the average level observed historically under the current macroeconomic conditions. In US Dow +0.1%, S&P 500 +0.2%, Nasdaq +0.2% and Russell 2000 +0.7%. The directionless trading continues this morning in Asia with half of the indices being higher and half of them being lower. European and US futures in small declines this morning.

FI: There was a small bearish tone in markets yesterday as curves flattened beyond the belly of the curve. Intra-euro area spreads were broadly unchanged on the day. Schnabel kicked off, what we expect is a number of central bank comments ahead of the September meeting yesterday morning. We argued for a 50bp rate hike in September and the view that a recession in itself would not get inflation lower. As a result the front end rose.

FX: Broad USD strengthened yesterday against European currencies in tandem with European natural gas prices reaching a new all-time high. Norges Bank hiked by 50bp and we see some short-term upside risk to EUR/NOK.

Credit: The cautious sentiment in credit markets continued while the primary market was rather busy with several financial institutions active in the Eurobond market. Itraxx main closing a tad tighter by -2.4bp at 97.2bp, while Xover tightened 9.8bp, closing the session at 491.9bp.

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