Finally, a (new) government and budget?
Close short-dated ASW spreads, consider moving further out on the Kommuninvest curve.
Trades
New , Buy Kommuninvest K2410 (Oct 2024) in an ASW @+23bp. P/L: 12/31bp.
Profit taken , Buy Kommuninvest K2012 (Dec 2020) in an ASW. Profit: 5.5bp.
Loss taken , Buy SGB1047 (Dec 20200) in an ASW. Loss: 3bp.
Finally, a new government and budget?
At the time of writing the Swedish Riksdag parliament has not yet voted for the Social Democrat Löfvén as Prime Minister, but this is probably only a formality. He will pass the parliament on Friday 18 January. He will now be able to form a government with the Greens (same as the outgoing government), but the platform for its future success has changed. It now rests on the 73-point deal struck with the middle parties, the Centre Party and the Liberals, and the implementation of the programme will be checked continuously. There is a glitch though. The government’s former support partner, the Left Party, has been ousted.
Its party leader says it will let Löfvén form the Government, while threatening it will propose a no confidence vote if some of the points in the deal are put forward. Currently, it is hard to gauge if this is an empty threat or not. If it does so at some point in the future, they will get enough support from the three right-wing parties to oust this government.
The budget implications are very unclear as the deal is largely without figures. However, 1) The income tax cuts from the Moderate/Christian Democrats enacted by the Riksdag in December cannot be reversed this year, but other tax cut can be changed (tax on airline tickets for instance) and will be reversed; 2) The deal contains a SEK15bn green tax swap, meaning environmental taxes (read energy taxes) will be hiked in exchange for tax cuts on jobs and business, 3) Income taxes will be cut by SEK15bn (SEK6bn lower payroll tax and SEK7bn in the top 5% state income tax), 4) It aims to reduce subsidised household borrowing by phasing out mortgage interest tax deductions (now 30%), 5) It aims at reopening talks on high-speed rail (a 20-30 year project), but it is unclear whether this will be financed within the DO framework or outside. Two politically very hot additional issues that the Left Party opposed are easing labour market regulations and increasing the degree of free rent setting. In total, we see the budget as mildly expansionary, but there is some uncertainty regarding the distribution (winners: high-income individuals in the cities, losers: middle-income individuals in the country, owning a house and dependent on cars for transportation).
Datawise, December inflation turned out a tenth higher i.e. spot on Riksbank’s forecasts for CPIF and CPIF excl. Energy at 2.2 % y/y and 1.5 % y/y. Looking forward, inflation is set to remain high in the first half of 2019 as the food industry needs to compensate for soaring input prices due to last summer’s drought. Later this year we expect core inflation to be lower than the Riksbank’s forecast. That said, the November consumption indicator was weaker than expected, suggesting consumption remains depressed in Q4. It also confirms our GDP model signal of a mere 0.8 % y/y GDP growth.
Is the unemployment rate bottoming out?
There are two important data points out this week pertaining to December which go into our GDP model.
The unemployment rate has dropped significantly over the past two months in an unusual seasonal pattern. While the unadjusted unemployment rate reached new lows (lowest since 2007-08), the development of the seasonally adjusted unemployment rate is more unclear. It appears to have been on an upward trend since February 2018, but the recent drop questions that trend. Labour market developments is the next big thing to keep in focus for the macro economy. We expect a slight increase in both unadjusted and seasonally adjusted unemployment in December.
The main question for retail trade is if the Christmas sales caused any further gain from the 1.1 % y/y recorded in November. For instance, the Swedish Trade Federation’s monthly index suggests clothing /shoe sales dropped by 3.8% y/y in nominal terms (and roughly as much deflated by CPI clothing). We have a slightly optimistic approach here, expecting sales in other areas to outweigh clothing, going for a 1.5 % y/y increase.
Close short-dated ASW spreads, consider moving further out on the Kommuninvest curve
Since we added K2012 ASW at end November, the position has performed by around 5bp. Admittedly, the spread performance has been supported by the trend higher in fixing spreads. In our view, we are probably close to the peak in fixings and expect ted spreads to move tighter in the coming weeks. The FRA MAR19-Riba JUN19 ted spread is currently trading around 14bp. Given that total excess liquidity continues to accumulate, we see no convincing reason why the equilibrium level for the 3M (NYSE:MMM) fixing spread would have moved higher.
The volatile demand for RB certicates may create some short-term noise, but we think that the current rise in 3M Stibor is unsustainable. Furthermore, the rise in the 3M Libor-OIS spread has abated since the turn of the year. Normally the correlation with 3M fixing spreads in SEK is rather unstable over time. However, the rise in swapped 3M USD Libor to SEK has probably been the main contributor to the SEK fixing spread widening. Thus, 3M Stibor could start moving lower in the near term.
As short-dated swaps have been pushed higher by the rising fixing spreads (ted spreads further out on the money market curve have also been affected), we are inclined to close our long positions in short-dated ASW spreads. Thus, we close our long position in K2012 ASW with a 5.5bp profit.
During fall, we also recommended buying SGB1047 (December 2020) in an ASW to benefit from the lack of t-bills and short-dated bonds going into year-end. Despite the rise in fixings, this position has not performed. As the rationale for entering the position is more or less gone, we close the position with a 3bp loss.
Longer-dated Kommuninvest bonds have performed poorly in recent months, both relative to covered bonds and to other agencies denominated in SEK. Although agencies have generally widened in ASW terms, the underperformance in Kommuninvest stands out. Kommuninvest now trades considerably cheaper than the less liquid EIB and Kfw in the same segment.
The underperformance relative to covered bonds also stands out. When credit spreads are under pressure as has been the case in recent months, Kommuninvest generally tends to perform relative to covered bonds as Kommuninvest bonds tend to behave as more defensive assets. This time around, the opposite has been true. Covered bonds have continued to tighten relative to matching Kommuninvest bonds despite the shift in credit sentiment.
Thus, we think the underperformance in longer-dated Kommuninvest bonds is overdone. We therefore recommend buying longer-dated Kommuninvest bonds, such as K2410 ASW (October 2024) @ +23bp. We set the levels to 12/31bp.
