Riksbank pricing has adjusted at the very front end of the money market curve after last week's policy announcement. The number of basis points of hikes up to the February meeting has jumped to 22bp from 16bp before the policy meeting. Further out on the FRA curve, the MAR19-MAR20 spread has flattened by 3.5bp to 35bp. Replicating the Riksbank's rate path suggests slightly more than 50bp of hikes per year, delivered in December and July over the next three years. The Riksbank will either start lifting the policy rate in December or delay hikes again. However, in the latter scenario, we believe something more significant needs to have happened. Our impression from the statement and the press conference with Stefan Ingves is that the Riksbank seems more determined and thus that the bar for postponing rate hikes is likely be higher going forward. For instance, its inflation path for H2 18 seems more realistic than it has for a long time. Furthermore, the central bank declared that the hikes will be delivered in 25bp steps. At the press conference, Governor Ingves justified this clarification by saying that as we are closer to the point of the first rate hike, it is time to become clearer about the step size to take. In our view, this is the first real sign of a determination to hike, although we will need to await meeting minutes in order to get more evidence (minutes due on Monday next week).
If inflation data in the autumn unfolds as anticipated, we expect the market to react accordingly (ultimately, we do not really believe the hikes will be delivered in the fashion the path suggests). Pricing up to the February meeting, however, seems close to complete, but there is room for more to be priced in for the following year, i.e. lifting FRA pricing closer to the Riksbank's rate path in the 6-18 month segment. In such a scenario, the MAR19/MAR20 would steepen. In the other scenario, where hikes are delayed again, pricing up to February 2019 is likely to decrease. Some of that could potentially be pushed to later in 2019 and/or early 2020 and, again, possible steepening of the curve. Hence, we believe steepening FRAMAR19/MAR20 is a good risk/reward @ 35bp with 46bp as a reasonable target. In our view, it seems unlikely that the 'soft' pricing of this segment would remain if the first hike is delivered during the winter.
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