Reading The Markets: Sweden‏

The FRA curve is almost unbelievably flat compared with previous recoveries. As the RB could soon turn more hawkish, we like paying SEK FRA JUN14.

Our flattener (long SGB1057 against SGB1049) has been closed as it reached our target at 70bp. We opened the position on 26 February at 96.5bp. In principle, we think the curve has the potential to flatten some more but for the time being we decided to close the position and await a better entry level.

Long-term bond yields in the U.S., Germany and Japan have in recent weeks breached lows for the year and this in itself could be a reason to look for a short-term correction. Nevertheless, central banks are likely to continue to play a leading role for some time to come. The BoJ’s new strategy to double the monetary base over two years by significant purchases of JGBs has obviously created the secondary effect of giving Japanese private investors a great incentive to switch JGBs for alternative assets abroad in order to improve return. Considering that EURJPY has moved more than USDJPY, it looks as if European assets (bonds) have received a fair bit of Japanese flow. In the U.S., Congress seems to be making little or slow progress as far as budget negotiations are concerned while the U.S. economy at least near term is set to face fiscal headwinds. Despite comments from several FOMC members in the latest Fed minutes, it seems likely that QE will be in place for some time yet. Turning to Europe, Mr Draghi at the latest ECB press conference acknowledged that weakness in Q4 prevailed at the beginning of the year and that data in coming weeks will be monitored very closely. Unsurprisingly, the markets took that as a sign that the central bank -- in one way or another -- stands ready to add more stimulus if needed.

Against this background we are of the opinion that the Swedish economy (again) has been able to hold up reasonably well -- or, as stated by Christine Lagarde, Managing Director of the IMF, in a recent speech, Sweden (along with the U.S. and Switzerland) are economies on the mend. At the current juncture, it is primarily domestic demand that is performing; consumer confidence has recovered, retail sales are doing reasonably well and the risk of higher unemployment has dampened. Another observation that deserves attention is that anecdotal evidence suggests that the housing market is strengthening. Home price expectations have risen significantly and this probably explains why the contraction in household credit growth that has prevailed since 2010 seems to have stopped. It is too soon to say whether credit growth will re-accelerate but the fact is that the current growth rate (around 4.5% y/y) probably means that the debt-to-income ratio is still moving (slowly) higher -- we estimate nominal income growth to be 3.5-4%.

Seen from another angle, Sweden is running below capacity and this cannot be refuted. On the other hand, the current repo rate has been characterised by the Riksbank as a policy rate for a crisis and we don’t think it is fair to say that Sweden is in a crisis. It may look odd that rising consumer confidence and high/rising housing prices can be explained given that unemployment is relatively high. One explanation is probably that unemployment is seriously skewed.

Unemployment among (very) young people (aged 15-24) is seriously high at 25% but in this group most people are actually students. For people aged 24-34 years unemployment is some 8%, which is in line with the national average but for the large group (with strong purchasing power) aged 35-64 years unemployment is at a more moderate level of 5%.

To Read the Entire Report Please Click on the pdf File Below.