It is time for the first tap auction in the SGBi3109 since it was introduced a few weeks ago. Swedish BEIs have been trading higher than European peers (Germany) but after the CPI data release yesterday (see details below), which was significantly lower than expected, longer BEIs now trade tighter in the Swedish market. With the 10Y BEI rate at 1.4%, it is starting to look attractive. We think the auction will be well received. We see longer BEIs as good protection for higher rates in a portfolio which is long delta in assets up to the 5Y segment.
The short BEIs took a beating after the low CPI reading. The shortest BEI3105 now trades just below 0.50%, which is considerably lower than our forecast up to maturity implies (1.18%). The Riksbank CPI forecast suggests an even higher average inflation rate up to September 2015. Despite this, the market expects the Riksbank to hike rates by some 40bp up to Q3 15. We do not agree with this pricing and see a certain probability that the Riksbank will cut again in April or July. Pressure will mount on the Riksbank if CPI outcomes continue to deviate from its forecast. We now expect the market to start pricing in a higher possibility of a cut and take away expectations of rate hikes between summer 2014 and summer 2015. Hence, as market pricing is so out of sync (inflation expectations versus rate hike expectations), we will continue to monitor the short BEIs and are ready to start buying short linkers in BEI spreads. However, since we see room for a further decline in short nominal rates, we are not in a hurry.
January inflation came in lower than our forecast. However, we had indicated that the risks to it were predominantly on the downside. Airline tickets and charter prices dropped back significantly as expected. Hence, the ‘surprise came in the form of larger-than-expected clothing sales, lower food and restaurant prices and lower rent increases. We have only made minor upward adjustments to our February forecast on the back of the January outcome. In effect, the inflation path for the next 12 months is shifted down slightly. Our long-term outlook remains unchanged: Swedish inflation will be structurally suppressed for the next couple of years due to the current record low three-year wage agreements running at about 2.2% per year and likewise record low wage drift. This suggests ‘wage cost’ based inflation is very close to 1%. In addition, rent negotiations suggest small increases in 2014 and we do not expect any significant inflation pressures from either the currency or from commodity-related related prices such as petrol, electricity and food.
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