Investing.com - Financial Markets Worldwide

Riksbank December Meeting A Close Call

ByDanske Markets
Published 11/08/2012, 02:00 AM
Updated 05/14/2017, 06:45 AM
TTEF
-0.84%
BMAm
-4.20%
NWSA
-0.18%

In a sense the minutes from the Riksbank’s 24 October policy meeting do not add all that much. Still, the discussion underlines that, even though they agree on indicating the possibility of a rate cut over the winter by lowering the rate path somewhat, the majority is not too happy about the idea of adding more stimulus; the repo rate is already low, monetary policy works with a lag and there is concern about household debt. Notably, there is also a new discussion on cyclical versus structural unemployment.

Of course, more recent Swedish macro data, especially quite negative signals from manufacturers (PMI at 43.1) and quite alarming news on lay-offs to mention a couple, are important information too, important enough to keep the case for a 25bp cut in December alive.

However, the market is currently pricing in 17bp (68% probability for 25bp) in December and another 14bp (56%) in February. Considering that "the rate is already low argument" will probably make the majority stickier the more they cut, we feel current pricing is somewhat stretched.

Therefore, we choose to pay RibaMar13 at 1.05, as we think the initial market reaction to the minutes is too subdued. Given the information available at this point, we believe that pricing in more than a total of 25bp over the December and February meetings is excessive. Also, the December rate decision is, in our view, a much closer call than pricing implies.

Buying RibaMar13 would to some extent protect our long position in 2015 mortgage bonds, which would undoubtedly be negatively hit if the Riksbank failed to cut rates in December.

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

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