Market sighs as Macron secures first round
The movers on the market today
This morning Norwegian and Danish CPI inflation data is due out. In Denmark, we expect inflation to have increased further to 5.2% year-on-year in March, from 4.8% in February. In Norway, we expect core inflation to come in at 2.3% yoy, slightly below what Norges Banks forecast in its March monetary policy report. For both, see more in the Nordic section.
Also this morning, the monthly UK GDP estimate for February is due out. The data is from before the Russian invasion and is therefore not that important from a market perspective.
We have some FOMC speeches in the afternoon. We expect politicians to repeat that the Fed is about to accelerate rate hikes.
On Thursday, we expect the ECB to keep the door open for a September rate hike, see ECB Preview: Lagarde to bring September into play – we revise our call to the ECB, April 8.
The overview in 60 seconds
French election: Incumbent President Macron came out on top in the first round of the presidential election and will face far-right National Rally candidate Marine Le Pen in the second round on April 24. While Macron’s lead in the first round (28%) over Le Pen (24%) was larger than he did in 2017, polls indicate a much narrower race for the second round (53- 47%). With Macron’s re-election far from assured, markets will be watching the polls closely in the coming two weeks. While most other presidential candidates have encouraged their supporters to vote for Macron in the second round, the upcoming televised debate could play a decisive role in influencing voters.
Inflation: China’s CPI and PPI figures for March surprised on the upside this morning as COVID worsened supply chain bottlenecks. PPI inflation remains high but has decreased to 8.3% from 8.8% in February. CPI inflation rose to 1.5% from 1.2% in February. Despite the increase, China’s inflation is subdued due to weak domestic demand and lack of pricing power, as well as low food price inflation.
Shares: Equities are up slightly on Friday but still driven by the defensive value universe. The stagflation trade sent stocks down 1% last week, but defensive outperformed value by nearly 6% and value outperformed by nearly 3%. Friday Dow +0.5%, S&P 500 -0.2%, Nasdaq -1.2% and Russell 2000 -0.3%. Massive movements in yields continue this morning, pushing European and US futures lower. Asian markets are also down, with Chinese technology leading the declines.
FI: European rates ended higher across the board on Friday, led by the front-end as EGB spreads were rather mixed amid strong curve flattening. The German 2-year rose 5bp to +0.04%. The 10s30s EUR swap flattened 2bp to -21bp on Friday.
Effects : While the past week has been characterized by a general strengthening of the USD and a decline of the EUR/USD, the single currency has shown a slight rebound after Macron’s comfortable victory yesterday. EUR/USD is back above 1.09 while EUR/SEK and EUR/NOK are hovering around multi-month lows around 10.25 and 10.45, respectively.
Credit: Credit markets ended the week on a somewhat mixed note, albeit tilting to the bearish side, particularly in the high yield space. Itraxx main remained roughly firm, widening just 0.5bp to close at 77.1bp, while Xover widened 4.5bp, closing the day at 370bp.
In Denmark, we get CPI inflation in March and expect it to rise further to 5.2% from 4.8% in February. The increase is based on three factors. First, oil prices sent gasoline and especially diesel prices skyrocketing in March. Second, the tobacco tax was increased by DKK 5 on a pack of 20 cigarettes in January. We have yet to see any real increase in cigarette prices and expect it to come with the March and April figures. Third, we expect the contribution to inflation from food prices to accelerate after a price spike at the start of the year and continued upward pressure from commodity prices.
In Norway, core inflation has surprised on the upside in recent months, but is still only slightly above the 2% target. Given stronger global inflationary pressures and higher wage growth, it is likely to continue to climb. Part of February’s surprise was a bigger impact on the prices of food and other imported goods, such as furniture. To some extent, this was likely the result of one-off price adjustments, and we expect these effects to fade in March. Nevertheless, we expect the upward trend in imported inflation to continue, and we therefore expect core inflation to rise to 2.3% y/y. That would be slightly lower than Norges Bank forecast in its March monetary policy report and should therefore throw cold water on market expectations of more than three more 25 basis point rate hikes this year. .