The euro made marginal news highs near $1.1060 while sterling and the yen have been confined to yesterday’s ranges. European equities are bouncing off ten-week lows. The dollar-bloc is firm; the upbeat RBA meetings provided only a short-lived fillip higher. Oil prices are steady to firmer after yesterday’s recovery.  

Sweden’s Riksbank is the first of four major central banks to meet this week.  As widely expected, it left its repo rate at minus 35 bp. Less anticipated, it refrained from extending its bond purchases. The euro had been at its best level against the krona since early November near SEK9.38 yesterday.  It fell to almost SEK9.26. A break here could signal a move toward SEK9.20. 

Norway’s central bank meets Thursday. While the Riksbank is focused on deflation, which does not appear to be have been beaten, the Norges Bank does not face deflation (Nov CPI 2.8%) but is more concerned about weak growth. Last week, Norway, for example, reported a 2.3% decline October manufacturing output. The consensus was for a 0.2% gain.  Norway’s deposit rate is at 75 bp. The Norges Bank had lowered the expected rate path; a minority expect a rate cut tomorrow.  It would likely weigh on the krone, especially if it does not appear to be the bottom of the rate cycle.  

The Federal Reserve’s much-anticipated meeting starts today. A rate hike remains the most likely scenario. The lack of a move now would arguably be more disruptive than a move, and more disruptive than standing pat in September.  Given market positioning, still very long dollars, and the holiday-mode, the dramatic response to the ECB’s disappointment risks being repeated.  

There have been some teeth-gnashing over the sharp sell-off in junk bonds, the jump in the VIX to its highest level since early October, and the drop in the 10-year break-evens. We expect the Fed to look past these short-run developments. Instead, the Fed is likely to remain focused on the positive momentum in the labor market. Unemployment of 5.0% matches many definitions of full-employment.  In the Great Recession, the US lost 8.7 mln jobs. It has grown 13 mln during the recovery and expansion.  In September, the three-month annualized wage increase was 2%. In November, it was 2.8%.