Morning Commentary: A Hawk Amongst a Flock of Doves
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
A Hawk Amongst a Flock of Doves
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Andrew Kositkun Foreign Exchange Head Trader
Central bank dovishness has been a central market theme, with banks scrambling to assure the markets that accommodative conditions will be maintained for the foreseeable future. However, the Norges Bank, Norway’s central bank, stands out from the pack. While the Norges Bank did leave rates on hold at its latest meeting, the bank was also unambiguously hawkish, as it pulled forward the timing of when it expected to hike rates by six months. It now sees a hike in June 2022 versus the original projection for hikes starting in December 2022. Additionally, the bank also raised its entire rate path.
Interestingly, there appears to have been a change in the factors behind projected rate increases. Two meetings ago, the bank referenced the need to raise rates due to financial stability concerns stemming from housing imbalances due to enduringly low interest rates. At its meeting this week, the Norges Bank now appears to be more driven by expectations for recovering growth supported by higher domestic demand and oil prices.
Regarding forecasts, growth and inflation projections remain relatively unchanged. But the bank’s tone has become more upbeat, with it expressing a willingness to look through near-term activity weakness and, instead, focus on an optimistic medium-term outlook. This medium-term optimism is informed by many factors, including higher household saving during the pandemic that is expected to translate to increased consumption once restrictions are lifted. This expectation is encouraging, as it means Norway’s potential recovery is less dependent on exports or investments. Finally, the central bank is willing to accept lower inflation and does not see continued low wage growth as a hindrance to rate hikes.
Taken together, recent market developments, relatively attractive valuations and the hawkish tone out of the central bank form a constructive Norwegian krone outlook.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
Markets have taken a pause from the sell-dollars-buy-risk trend, with concerns over Brexit and U.S. stimulus once again flaring up.
On the stimulus front, two senior Senate Republicans are now seeking language that would end the Fed’s emergency programs. Conversely, Democrats would like emergency programs to remain until 2026. It now appears that another stopgap bill is needed to avoid a government shutdown, as talks are likely to extend into the weekend.
On Brexit, talks have once again turned pessimistic. Per the headlines, fishing continues to be the issue, but as always, it is difficult to assess what is an actual red line and what is just posturing. Case in point, fishing accounts for 0.1% of U.K. GDP, so it is possible that this issue is being used as leverage to gain concessions elsewhere. A skinny deal remains the base case, but expect elevated volatility as British pound price action remains tied to negotiating headlines. Data wise, U.K. retail sales fell 3.8% month over month, as renewed lockdowns had a negative impact but to a lesser degree than expected.
A board of FDA advisors has voted to back Moderna’s vaccine candidate. In Europe, the European Medicine Agency will meet next week to review the Pfizer-BioNTech vaccine.
U.S.–China tensions are back in the news, with the U.S. set to blacklist SMIC and more than 60 other Chinese companies in order to protect national security. This move will restrict access to U.S. technology. In response, China said the policy violates international trading rules and imposed anti-dumping duties on rubber products.
Germany’s IFO survey came in more upbeat than expected, with the business climate, expectations and current assessment sections all rising. However, it should be noted that the survey was conducted before the most recent lockdown was implemented.
The Bank of Japan (BoJ) kept rates unchanged as widely expected. The bank also announced an unexpected policy review that will conclude in March. The bank stressed that there was no need to scrap its yield curve control as part of the review but did suggest that tweaks could be coming. It is like that ETF purchases will be a focus of this review. Japan also reported national CPI, which came in at -0.9% versus expectations for a -0.4% year-over-year print. The inability to move inflation toward target levels is certainly not lost on the BoJ and its decision to conduct a policy review.
Australia, which just had a blockbuster jobs report earlier this week, is fighting a new COVID-19 outbreak. It has been reported that the outbreak came from an international traveler that did not abide by local quarantine restrictions. New South Wales (NSW) Official are working on contract tracing as other states impose quarantine restrictions on NSW travelers. In a nutshell, this illustrates the problems facing the global economy. It seems as soon as positive momentum starts to build and restrictions begin to relax, another outbreak pops up.
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