Fed tempers optimism about US economic outlook

Market movers today

• We expect Norges Bank to keep the policy rate unchanged at 0.00% and not send any new signals today (see more below).

• The ECB minutes will cover the relatively uneventful meeting in July.

• We also get US jobless claims.

• The Turkish central bank rate decision is due — we expect the official rate to be left unchanged but other measures to be used to tighten liquidity.

• Tensions are likely to continue to simmer in Belarus and between Russia and the EU.

The 60 second overview

Fed minutes: The Fed minutes signalled considerable concern about the outlook for the US economy, where the ongoing health crisis prompted by the coronavirus could weigh heavily on economic activity, employment and inflation in the near term but also pose considerable risks over the medium term. Against this background, "several" officials suggested that additional accommodation would be required to help the economy. However, the committee did not seem ready to make an imminent change to its monetary policy framework at the September meeting, with a number of participants indicating that such change would be "appropriate at some point". The minutes clearly revealed a preference in the committee for outcome-based thresholds (such as inflation or unemployment outcomes) rather than yield curve control.

EU vs. Belarus: Following an emergency conference call between EU leaders yesterday to discuss the crisis in Belarus, leaders urged for "dialogue" between the two sides in Belarus after the disputed election and decided to go ahead with sanctions against key Belarusian officials seen as responsible for violence and vote-rigging. However, the leaders stopped short of calling for fresh elections, which would have angered Russia, which had warned against meddling in domestic politics in Belarus.

Equities: Following positive sentiment in the European session, US equities ended lower after the Fed minutes suggested concern about the economic outlook and Asian markets have followed the US market lower overnight.

FI: In Europe, yields ended marginally lower between 1-3bp across the European sovereign curves, leaving spreads broadly unchanged between periphery countries and the German Bund. US yields initially rose following the Fed minutes, which show that the committee clearly prefers an outcome-based approach over yield curve control, but are generally lower overnight.

FX: USD strengthened on the slightly hawkish Fed minutes, where a September shift no longer seems to be set in stone; EUR/USD dipped below 1.1850. EUR/CHF jumped markedly yesterday but otherwise the G10 sphere including the Scandies have seen only muted moves.

Credit: Credit markets were a slightly mixed yesterday, with iTraxx Main ending the day slightly wider, while Xover tightened almost 7bp. The EUR primary market is still in holiday mode but we expect issuance to pick up again over the next week at the latest.

Nordic macro and markets

Norway: We expect Norges Bank to keep the policy rate unchanged at 0.0 % and not send any new signals today. This is an "interim" meetings with no monetary policy report or press conference, only a press release. However, the risk is tilted to the upside.

We expect the oil investment survey from Norway to confirm a moderate fall in oil investment this year and around a 10% drop in 2021.

Sweden: We expect the July LFS survey to show a rise in seasonally adjusted unemployment to 9.5%, which is also the market consensus. We keep an extra eye on the development of hours worked, as it gives clues about how real economic activity (and not least job furloughs) is developing. It is the first "hard data" released for July.

The Riksbank is buying SEK5bn of covered bonds in 2024-25 maturities.

The Riksbank's Skingsley talks about the current economic situation and monetary policy. This would be the first time since the monetary policy decision on 1 July that any of the executive board members comment on developments. We expect her to address the appreciating SEK. KIX has strengthened about another 3% since then. The speech is set for release at 16.30 CEST.