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Swedish Rate Wrap

Swedish Rate Wrap — Global crossroads and new domestic target?

Global crossroads and new Riksbank target
We have identified three driving forces behind the strong global industrial business cycle: stimulus measures by central banks, a rising oil price and stimulus measures from Chinese authorities. All three are temporary and in the absence of new stimuli, the positive effects already appear to have reversed. We go through the arguments and conclude that global bond yields have a limited upside, and we change our recommendation from short to neutral.

April inflation figures were a positive surprise, involving significantly higher inflation than expected. But few things last for ever, and we expect lower inflation in the future. In line with expectations, the Riksbank proposes to move to CPIF as the target variable and introduce a tolerance interval ±1 percentage point around the 2% inflation target. Our conclusion is that this warrants no change in the near-term outlook for monetary policy.

Andreas Skogelid, Strategist |

Swedish Rate Wrap — Once again, the Riksbank surprises

And so the Riksbank did it again: surprised the market by making monetary policy even more expansionary by increasing bond purchases for the remainder of 2017 and by pushing back the repo rate path. Our risk scenario had identified increased bond purchases, but we thought that the Riksbank would have a dovish tone rather than taking sharper measures. If we dust off our crystal ball and look toward 2018, we see an interesting situation arising when it is time for many of the Executive Board members to be replaced, given that the Board was as split as it is possible to be when taking this past week's decision.

We review our recommendation for mortgage bonds and see further scope for narrower spreads in the future. For more details, see page 4. 

Andreas Skogelid, Strategist |

Swedish Rate Wrap — A headache for the Riksbank

We are approaching the Riksbank's second monetary policy decision of the year (the decision will be announced on April 27). The March inflation figure was a clear disappointment and, when evaluating developments since the February meeting, there are a number of other factors on the negative side. On the other hand, the economy is going at full speed. Overall, our view of the Riksbank remains unchanged: the repo rate path remains static and there are no increased bond purchases after the end of June. However, the risk scenario is on the dovish side.

Andreas Skogelid, Strategist |

Swedish Rate Wrap — Wage agreements are a chilly wind around the Riksbank

The wage settlement agreed upon with a range of unions in the industrial sector challenges the Riksbank's vision of a clear acceleration in wage increases in the future. The three-year agreement, with annual increases of 2.1-2.2 percent, means that other parts of the economy need to secure significantly higher wage increases. This appears somewhat unlikely, given that this wage agreement usually sets a norm. The agreement represents a major challenge for the Riksbank as it strives to ensure domestically-driven inflation.

We are changing our recommendation for Swedish mortgage bonds to Long from Neutral. We see a number of arguments for long spreads in EUR being imported to Sweden. In addition, there are a number of covered positive domestic factors, such as the Riksbank's impact on Sweden's bond markets diminishing after mid-year. For more details, see page 4.

Andreas Skogelid, Strategist |

Swedish Rate Wrap — Oil price fall challenging the inflation trend

The global economic climate continues to be strong. We see evidence of this in the US where most macro data is exceeding market expectations. The recent harvest of data from China confirms a strong start to the year. The trend in global inflation is also positive. Previous monetary policy stimulus measures are feeding into the economy and contributing to the improvement that we are now seeing. This forms the basis of increasing long yields.
Inflation is partly driven by earlier energy price rises. The price of oil falling to USD 40/barrel by year-end represents a risk to our view of inflation and long yields. Despite this, we still believe that interest rates will continue to rise. We address this on page 3.

Pierre Carlsson, Strategist |

Swedish Rate Wrap — Election year impacting European yields

Populist winds increase the risk in France
Macro data continue to show a stronger start to the year than expected, which forms the core of our view of increasing rates. While bond yields have recovered part of their recent loss, the drama has mainly been concentrated on US short-term interest rates, which have risen dramatically, and a Fed hike in March that is more or less a done deal (see page 3).

The European election year is on the starting blocks, with the Netherlands first out on March 15. We are on the lookout for political impacts on the financial markets and are finding plenty (see page 3).

The Swedish government, with the support of the Left Party, has put a stop to the proposed bank tax. This comes after devastating criticism about its structure from several referral authorities. However, this will be compensated by an increase in the resolution fee. Given that the fee is based on the balance sheet at year-end, we anticipate even greater effects in the short-term fixed income market during the last two weeks of the year (see page 5).

Andreas Skogelid, Strategist |