Both the ECB and Fed are on hold in 2019 but the Bank of Norway is hawkish.
Fixings might not return to ‘normal’ – ASW spreads in short govvies have room to widen.
SEK: Surprised but not worried.
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New, buy SGB1047 ASW at -48.5bp. P/L: -55/-42bp.
Both ECB and Fed on hold in 2019 but Bank of Norway hawkish
Some weeks ago, we learned that the ECB will be on hold throughout 2019 and that it will introduce a new set of liquidity operations. Now we also have the message from the Fed saying no rate hikes in 2019. This is a quite significant change of tone from the Fed. The outlook for growth and inflation has deteriorated due to Europe and China and inflation expectations are moderate, so the appropriate policy response is to keep rates on hold. In addition, the balance sheet reduction will be scaled back to end in September. On the back of this, it is hard to see any meaningful increase in long-term yields.
At the same time, the Bank of Norway struck a hawkish tone. The 25bp rate hike was expected but the Bank of Norway also raised the rate path going forward, which we did not expect. The policy announcement is part of the Riksbank’s equation but the Fed and ECB are more important.
Recent speeches by Riksbank board members give the impression that much has changed. Even the latest lower inflation prints do not appear to have made much of an impression. Nevertheless, we are convinced the Riksbank is thinking hard about what conclusion to draw from the new ECB/Fed policy guidance.
Surely, the Riksbank has a lot of time for thinking to decide whether another rate hike in Q2 (September) is still warranted. Looking at the next policy meeting (April), we cannot find any valid reason why the Riksbank would sound more hawkish let alone hike the repo rate. However, we would not rule out that it will keep the repo rate path unchanged, something that would probably be taken as a hawkish sign.
Brexit getting more chaotic by the day
The Brexit process is another issue that policymakers must take into account. So far, we have regarded a disorderly Brexit as a tail-risk. Number 10 Downing Street has applied for an Article 50 extension until 30 June. The reply from EU officials is that such a short extension is conditional on the British parliament accepting the agreement it has twice rejected, otherwise an extension must be significantly longer. The latter appears to be unacceptable to the British Prime Minister. Time is running out.
If we define a tail-risk as something with a very low probability, we can longer treat a disorderly Brexit as a tail-risk, simply because the Brexit issue is becoming increasingly chaotic and there is no meaningful way to assess probabilities in a chaotic process. In our view, this will also be a part of the Riksbank equation going forward. A disorderly Brexit would be a bad thing but a long extension, although probably less disruptive, would not be all that much better, because European businesses – and consumers – would have to live with continued uncertainty for an extended period.
At last some data
A new set of economic data is due to released next week and one thing worth mentioning is the NIER business and consumer survey.
We have been somewhat puzzled by the mix of data in recent surveys. Manufacturing is doing pretty well, while services producers are gloomy. Considering the ongoing discussion about a global slowdown and Sweden’s export dependence, we would have thought it should be the other way round. Turning back to the Riksbank, the policy strategy (slightly simplified) relies on three critical factors: the labour market, inflation expectations and inflation. As long as the labour market is (and is expected to remain) strong and inflation expectations are in line with the target, the Riksbank has a higher tolerance for a short-term deviation in inflation from the forecast.
To read the entire report Please click on the pdf File Below..