- New, sell (Rec) SEKFRAJUN15 at 1.08%. P/L:0.95%/1.20%. Roll down 3bp/m.
- Take profit, sell (Rec) SEKFRAMAR15 at 1.10%. Profit 14bp.
- Take profit, Rec 52 versus Pay 2s10s in a swap fly 6M forward at 21.5bp. Profit 16.5bp.
As we have described in recent reports, we think there are good reasons for the Riksbank to work actively to bring inflation back to target more quickly by (a) cutting the repo rate, (b) adjusting the repo rate path distinctly lower and (c) providing forward guidance ‘Jansson style’ that conditions future rate hikes to inflation reaching a certain level. It boils down to stopping inflation expectations from declining further. For this to happen, we think the Riksbank needs to communicate policy going forward in a way that gets a more lasting effect on rates, spreads and implicitly the krona than hitherto. One may claim that longer term (5Y) inflation expectations are still reasonably well anchored at 1.8% but we think the Riksbank would be wise not to wait until it really gets de-anchored because then it may be too late.
The simple reason we see a July rate cut as more probable than an April cut is that the latest CPIF outcome was rather close (0.1 percentage points below) to the Riksbank forecast, while our projection suggests the gap has widened to as much as 0.4 percentage points by the July meeting.
There is one thing that requires some attention tomorrow – something that could potentially be of importance for the rate path – and that is productivity. In February, the Riksbank estimated total GDP productivity for 2013 at 0.4%. Data published since shows that the actual number was 1.1% – a big difference that partially helps to explain the lower-than-expected inflation, in our view. In a sideline scenario (relating to business sector productivity, which was 1.7% in 2013), the Riksbank illustrates how a higher assumption on productivity – all else being equal – would affect the rate path. Higher productivity implies lower ULC and hence justifies easier policy. We do not claim that the Riksbank is about to make such a big change in its productivity assumptions as suggested by the sideline scenario but even a somewhat smaller adjustment has the potential to affect the rate path tomorrow.
Our Riksbank view still supports receiving in FRAs
Ahead of the Riksbank meeting, we have decided to take profit on the FRAMAR15 contract (profit 14bp) and instead move out to the JUN15 contract. We expect (our best guess) the Riksbank to delay the first hike until later in 2015. Remember that in its rate path the Riksbank has a rate hike at each meeting, except one, next year. This is relatively aggressive and gives plenty of room to alter the rate path, as we believe the Riksbank needs to alter its inflation forecast. Hence, in our view, the most likely outcome is that the bank will flatten the rate path.
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