Main takeaways
The Riksbank cut GDP growth slightly and raised the CPIF inflation path due to higher energy prices and a weaker krona - quite minor adjustments overall. It made a small upward revision to the core CPIF excl. Energy too (see chart), but not enough to change the annual average. The Riksbank still appears to be concerned about slowing services prices, which were driven higher in 2017 due to special factors. With regard to the GDP outlook, it says that growth was temporarily weak at the beginning of the year. We are slightly surprised to see that it remains optimistic about the outlook for the rest of the year given that residential construction is affecting GDP significantly and the risk of a trade war. This time, Deputy Governor Ohlsson was accompanied by Deputy Governor Flodén (as indicated in the April minutes) in dissenting from the repo rate path and both dissented from the extension of the FX intervention mandate. Naturally, the upcoming minutes will crucial in gauging the strength of the 4-2 majority. We stick to our call that the Riksbank will postpone the first hike beyond 2018, although we see a small chance/risk it might move already in Q4.
Fixed income
SEK rates underperformed initially, with a steepening of the FRA curve and the SGB curve shifting higher in a nearly parallel manner. We understand this initial price movement, given Flodén's formal reservation about the rate path (though it was already known that he considered earlier hikes than implied by the path) and as there were a noticeable lack of softer comments related to the composition of inflation (driven by energy prices and the weak krona), the fact that the ECB will remain on hold longer than expected and only a minor revision to GDP forecasts. We are now pricing around 30bps in rate hikes up until the July 2019 meeting. Our receiving positions in FRA DEC18 and JUN19 suffered slightly on the announcement. Ahead of the Riksbank, we acknowledged that risk/reward in JUN19 was less compelling than before and advised generally reducing exposure in long money market positions. However, we still like receiving FRA DEC18 as rate hike expectations are still elevated around year-end and we see downside risks to fixing spreads for the DEC contract. We remain comfortable with our curve flatteners relative to EUR. The combination of a slightly hawkish Riksbank (with the nearest meetings still in play) and weakening growth should be supportive going forward.
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