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Sweden: Focus Should Start On Possible Rate Hikes

ByDanske Markets
Published 03/06/2013, 06:52 AM
Updated 05/14/2017, 06:45 AM
BMAm
-2.28%

In many respects, Swedish macro data has turned out better than expected. The experience over the past year or so is that both unemployment and employment have gradually increased. It is possible though, that there may have been some signs of stabilisation in the latter over the last couple of months. If confirmed, this would certainly be an important signal. We have a feeling that the Riksbank decided to ease by 25bp to 1% in December, to a certain degree on signs of a relatively steep decline in economic activity that did not fully materialise. We believe it will soon be time to start focusing on the possibility of rate hikes.

We expect the next move from the Riksbank to be a hike and that the market will start assessing this possibility soon. Current pricing does not reflect any strong conviction for rate hikes over the next 18-24 months on average. On the contrary, the FRA curve is very flat indeed, and does not imply the probability of rate hikes close to previous cycles, when the repo rate was cut for the last time. We believe that once the Riksbank signals that the first rate hike is getting closer the FRA curve will steepen. The shape of the current repo rate path, implying three hikes next year, was outlined in the midst of the gloom last autumn. This is a good illustration of the Riksbank's reluctance to keep the policy rate too low for too long.

We recommend buying FRASEP14 @ 1.655%, P/L: 1.90%/1.50% and buying FRAJUN15 versus FRAJUN13 in a money market steepener @ 58bp. P/L: 90bp/45bp. Remember the curve steepener JUN13/JUN15 traded at 87bp a couple of weeks ago. A move towards that level is not unlikely, in our view.

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