This Friday, Swedish GDP data for Q3 will be released. So what? Well, we believe growth data will be important for the Riksbank and market pricing as we come closer to, and enter, 2015. Inflation will remain subdued and the Riksbank will not hike until the inflation rate is close to the 2% inflation target. Don´t hold your breath. In our view, only a miracle will take inflation back close to target in 2015.
The Riksbank expects inflation to lift gradually in 2015 as growth improves and, accordingly, companies are expected to raise consumer prices in order to boost margins. A slowing of Swedish growth would be a direct blow to the Riksbank’s view. Indeed, private consumption has been flying high in 2014 but will disappoint in 2015. We saw indications of this in today’s NIEW consumer confidence data.
Hence, pricing will also be at stake if data deteriorates. For the moment, longer RIBA contracts trade close to zero. Hence, an additional hike is not priced into the market. We see no chance of a rate hike in 2015 and thus the RIBAMAR16 contract is as close as it gets to a free option for an additional rate cut.
It is possible to sell matching FRA contracts or short government bonds but these experience a much higher volatility. Sell (receive) RIBA contracts at zero, P/L at- 10/+5bp, put in the drawer and wait for the next move either by the Riksbank or ECB. If the ECB does QE, the RIBA yields will most likely drop into negative territory. Hence, receiving RIBAs at zero is an alternative trade for ECB QE, as much of that might already be priced into the European markets.
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