Trades
New. Sell (receive) JUN15 and buy (pay) JUN16 in a FRA steepener @ 59.5bp. P/L: 75bp/48bp. We expect the front contract to decline but the position will also give some protection to our outright receiver position in JUN15 if global rates rise.
Riksbank getting closer to July rate cut
The Riksbank behaved roughly as expected, cutting forecasts for both the CPI and CPIF and, as a consequence, shifting the repo rate path down and slightly forward. However, against the background that the Riksbank does not expect CPIF inflation to exceed 2% until March 2017, the question is why did it not cut the repo rate this morning? It is hard to see the logic in this. It could very well contribute to long-term inflation expectations dropping further below the 2% target, eroding credibility.
Still, we expect inflation to gradually turn out below the Riksbank’s new CPIF forecast; hence, there is pressure on the Riksbank to deliver a rate cut in July (Riksbank itself give a 40 % probability for a cut in H2). Moreover, we do not believe the Riksbank’s first rate hike will happen until Q3 15.
The Riksbank did not add any news about the fundamental inflation drivers.
It still argues that inflation cannot be explained by the normal relationship with firms’ costs. In our view, this does not make sense, as there is strong evidence that wage growth will remain sub-par for several years and higher productivity growth going forward could easily aggravate this situation. Our view contrasts with that of the Riksbank, which expects wage growth to gradually return to normal. In the absence of any other factors that could push inflation higher, such as a weaker Krona or rising commodity prices, inflation is likely to continue to run below the Riksbank’s forecast.
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