Continued steepening in sight
We saw huge interest rate movements in the aftermath of the US election, and this trend has continued. The Fed's re-pricing has been clear and the market is starting to approach two rate hikes in 2017. An increase in December is a dead certainty. The market is thus moving toward the Fed's own interest rate forecast. We see knock-on effects in the Swedish market and consider there to be scope for a steeper Swedish curve, which is supported by the increasingly strained labour market.
There continues to be a major, widespread shortage of dollars after the changed rules for US money market funds which took effect on October 14. The question is how far the Fed and other major central banks will allow this to go before they again start to utilise the facilities that are still available since the major financial crisis eight years ago.
Broad mandate results in higher inflation and higher interest rates
With Trump in the White House and a Republican majority in Congress through clear election results, it is reasonable to assume that a relatively large number of election promises will become reality. While the details remain ambiguous, a growth surge and positive inflationary impulse are likely to ensue, though the timing of these effects may be uncertain. The Fed will hike the Funds rate in December and long yields will continue to climb. However, all this assumes that the current lack of pronounced stress in the global financial markets will continue.
We are approaching the Swedish October inflation report. For the Riksbank it is crucial to avoid another negative surprise. We do not believe there will be any such surprises, and Swedish inflation will be significantly higher in one year compared with today. The Riksbank is expected to leave the repo rate unchanged in December. Nevertheless, we retain our view that the Riksbank will extend its bond purchase programme during the first half of 2017, as insurance against a sharp appreciation of the krona.
More bond purchases but unchanged repo rate ahead
Despite a Riksbank decision that was in line with our expectations regarding actual policy decisions, the tone of the communication was definitely dovish. In principle, the Riksbank is promising to extend its bond purchasing programme beyond year-end, while simultaneously signalling a high probability of a lower repo rate. We look at the arguments and conclude that at its December meeting, the Riksbank will extend its bond purchases by SEK 30 billion, with purchases taking place during the first part of 2017. However, an Executive Board with differing opinions will leave the repo rate unchanged.
One low monthly figure is not enough for new measures
September's monthly inflation figure was a surprise for most people, but probably most of all for the Riksbank, which was expecting 0.4 percent higher in CPIF terms. A year ago, a similar outcome would have resulted in a policy response (chart 1). It is certainly a reason for concern prior to the monetary policy meeting in October, but our definite opinion is that it does not call for a change of direction in monetary policy at this stage. The situation is totally different from last year. The Riksbank has managed to exceed its goal in terms of a weak currency and can afford to wait for additional information before the December meeting. That information will be in the form of two further inflation outcomes: a "major" Prospera survey about inflation expectations and the December ECB meeting.
Financial markets once again turbulent
The calm after the financial turbulence following the results of the UK referendum had just descended. Then, the radar quickly refocused on the Italian banking system and its clear structural problems. Now, we are seeing renewed concerns regarding Deutsche Bank's obvious problems. These are basically entirely separate issues, but the consequences are similar. Once again, the focus is on the banking regulatory environment which prevents state support to crisis banks. This week, we look at how well Swedish mortgage bonds are coping with the current turmoil.
ECB gives the Riksbank a boost toward a new era
You could almost hear a sigh of relief from the Riksbank at the end of last week. After the ECB's statement that changes to the ongoing bond purchases were not even discussed at the September meeting, the market seems to realise that the central banks will not always be there to provide assistance in the form of lower interest rates. In addition to starting a wave of bond sales, this gave the Riksbank time to wait for rising Swedish inflation, without needing to relate to external changes in monetary policy. This gives an additional reason for looking at the short end of the Swedish curve, where there is scope for steepening. For more details, see page 3.