Danske Daiy - US-China Trade Talks Continue In Beijing

This week we have a number of important events ahead of us. In the US-China trade talks , US representatives Mnuchin and Lighthizer arrived in Beijing today for negotiations. Lower level talks will take place at the beginning of the week to prepare for high level talks on Thursday and Friday. A lot of work needs to be done before a deal is on paper and we could very well be into Q2 before a deal is signed at a meeting between US President Donald Trump and Chinese President Xi Jinping, see more reports this weekend saying there is no progress on wall discussions, reducing the probability of a passed budget. In the UK, MPs will have an indicative vote on how to proceed with Brexit on Thursday. Also, the Riksbank is due to meet on Wednesday.

Today, the UK preliminary Q4 GDP growth print is being released, which we estimate at +0.3% q/q (+0.1% m/m in December). The growth picture has become weaker, as Brexit uncertainties are weighing on investments and global growth has slowed.

Also today, Norwegian and Danish inflation data is due out. In Denmark, we expect 0.9% (more on page 2).

Stock markets continue to tread water as anxiety over US-China trade talks turned up a notch last week on the news that Trump changed his mind on meeting Xi this month. Markets are mixed in Asia with only the Chinese onshore indices higher as they play catch-up after being closed during the Chinese New Year holiday last week.

In the Brexit saga, the next thing to watch is a vote on Thursday in the British Parliament. The Strait Times have details on the vote here Reuters .

US destroyers sailed near Islands in the disputed South China Sea waters , a move that is likely to anger Beijing. However, it is unlikely to affect the trade talks, which both sides seem to agree on is a separate track from other areas of tension.

The IMF backs the Fed pausing its interest rate hiking cycle . The new Chief Economist Gita Gopinath said it would have a positive impact on the US and that the IMF endorses the Fed's data-driven approach, see FT .

Scandi markets

In Denmark, we estimate CPI inflation increased to 0.9% in January from 0.8% in December. January has historically been the most unpredictable month, as many prices only change once a year. For details, see weekly focus here.

In Norway, core inflation has been at or slightly above Norges Bank’s target recently and somewhat higher than projected earlier by the bank. High electricity prices have pushed up headline inflation. Two stories are likely to be apparent in the January CPI data. High core inflation is an argument for Norges Bank following the plan and hiking the sight deposit rate at the upcoming board meeting on 21 March. Norges Bank concluded at the 24 January policy board meeting, after December CPI-ATE at 2.1% y/y, that ‘inflation has been slightly higher than expected’. Cold weather and the spill over from the European electricity markets suggest another high headline reading in January – at or slightly above the December level.

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Fixed income markets

In the global bond markets it is a ‘race to the bottom’ with Bunds getting closer to 0% and 10Y Treasuries moving towards the Fed funds rate on the back of the expected slowdown in the global economy, the political uncertainty regarding the trade spat between US and China as well as another possible government shutdown in the US. Furthermore, core EU curves such as Germany as well as the EUR swap continue to flatten between 2Y and 10Y.

However, Italian government bonds have been under pressure after the downward revision of growth for 2019 by the EU commission. The spread widening seen in Italy versus peers last week is overdone as we discuss in our Government Bonds Weekly, see here. Hence, we expect that the spread between Italy and Germany will stabilise and we recommend to buy the 1Y T-bill that will be issued on Wednesday.

We have string of supply this week with Germany, the Netherlands, Italy, Ireland and Portugal coming to the market. There will be focus on the Italian auction but as it is only selling EUR4.5bn in a 2Y and 6Y maturity, the auction should go smoothly. In Scandinavia there is focus on the Riksbank meeting on Wednesday. We expect it to keep a wait-and- see stance, see more in Reading the Markets Sweden, 8 February. On top of this there is an auction in the 9Y SGBs, where demand is likely to be strong.

FX markets

We expect the Riksbank to leave the rate path unchanged on Wednesday. While the global outlook has deteriorated, the Riksbank lowered its growth estimates already in December so only marginal, if any, changes will be needed this time. Still, we would not be surprised if the press release is softish, which could further pressure on the SEK. The Riksbank’s FX intervention mandate expires at this meeting. In our view, it would make sense to scrap it, but we are not sure the Riksbank agrees. The SEK could get some support if it is not renewed. Read more on our SEK views in Reading the Markets Sweden.

In Norway, a couple of shaky risk sessions alongside lower front-end NOK rates have contributed to the NOK erasing recent gains from technically overbought territory. Importantly, lower NOK rates reflect technical factors and not a repricing of the monetary policy outlook. Indeed, the past weeks’ set of data releases (incl. Friday’s GDP release) have all been on the strong side. Also, today’s inflation report is likely to show that core inflation at this stage will add a positive contribution to NB’s rate path strengthening the case for picking up NOK from current levels. We remain short EUR/NOK and long NOK/SEK.For GBP, the most important event this week is the Brexit vote in the House of Commons tomorrow. Here the MPs have the opportunity to force PM Theresa May to ask the EU27 for an extension of Article 50. If triggered, it will be supportive for GBP and could send EUR/GBP towards the lower end of the 0.86-0.89 range, which we still expect to hold near term.