- Riksbank minutes likely to show decision was a compromise
- Unemployment - time for a correction?
Riksbank minutes likely to show decision was a compromise
The Riksbank minutes are likely to show that there has been significant disagreement within the Executive Board about the shape of the repo rate forecast and that the surprising flattening of the path was the result of a compromise. Arguably, Per Jansson as the most dovish member has seen weakening global and domestic data, easing signals from both Fed and ECB and global bond yields plunging into negative this summer as signs that the next step for Riksbank is to postpone rate hikes or even prepare to cut rates again. At the opposite end we have Henry Ohlsson and Martin Flodén who have both been at the forefront of raising rates. Ohlsson has probably continued to argue that the economy and labour market is strong and inflation and inflation expectations close to target. Flodén may have been more concerned about the SEK weakness. We believe a middle way between an unchanged repo path and a postponed one was the flatter. The discussion should be put into the context that this week we saw all measures of August inflation being 0.2 p.p. below forecast and Prospera’s broad-based quarterly inflation expectations falling again on all horizons.
Speaking of central banks, now the Riksbank is no longer in doubt what the ECB will do. The deposit rate has been cut by 10bp while keeping the door open for more. The press release says….‘expects the key ECB interest rates to remain at their present or lower levels…’. QE has been re-started by EUR20bn per month, more or less open ended. The ECB says that QE is to run for as long as necessary and to end shortly before they raise interest rates. We guess that could take a while. There is a reason behind all this. Growth is too poor and inflation stuck too low. Hard to believe that the Riksbank can stick to the ‘all looks pretty fine story’ for long.
Unemployment – time for a correction?
Unemployment data for the last couple of months have been quite awful. On top of that data, other job-market data confirm that labour market conditions are cooling down. Employment has turned down, overtime hours are dropping and vacancies are off their peak. According to PES (arbetsförmedlingen) monthly statistics, several columns have decreased since August last year. New vacancies declined 22.4 % y/y, remaining vacancies and applicants who got employed decreased 13.7% and 17.8% y/y respectively. However, vacancies are still at quite a high level.
Having said that, one should also keep in mind that summer months are volatile and subject to uncertainty. In seasonally adjusted terms, unemployment has spiked from 6% in April to 7.1% in July. Honestly speaking, this looks somewhat exaggerated. Therefore we would guess that it is time for a correction. Given the fact that seasonally adjusted numbers are very volatile, a forecast is really a matter of informed guessing. Nevertheless we are looking for a decline in unemployment (s.a.) from 7.1% to 6.8% but would not be too surprised to see a somewhat bigger correction. On the back of this, we are looking for a drop in unadjusted unemployment from 6.9% to 6.3%. A smaller – or no – correction downwards in unemployment would really be astonishing.
Overview of current recommendations
Last week’s Riksbank decision, where it kept its forecast of a rate hike by year end, obviously hit our recommendation to go outright long in 2Y covered bonds. However, after the poor inflation expectations and inflation data we feel that the case for a rate cut next year is still very much alive. Our inflation forecast is substantially lower than the Riksbank’s, and low inflation will in turn likely lower inflation expectations further. The next quarterly Prospera inflation survey will be released on 11 December, about a week before the Riksbank’s December decision. If our inflation forecast proves correct, both inflation and inflation expectations should make it difficult for the Riksbank to hike, but rather increase pressure to ease policy. Add to this the worrying signs from the labour market described earlier. Currently, the market is pricing about 7bp of Riksbank cuts over the next 12 months, about 10bp less than before the Riksbank meeting. We find that too little, and consider the risk-reward for the 2Y covered bonds segment attractive.
Nordic market players turn bearish on the SEK – Danske survey
Yesterday we published the quarterly FX Thermometer. This time we asked our Nordic client base whether Norges Bank will hike this year and whether the next move from the Riksbank is a hike or a cut. Clients also gave their three-month (9 December) forecasts on EUR/SEK, EUR/NOK and EUR/USD.
Main takeaways
Norges Bank. A majority of the respondents in our survey thinks that Norges Bank will decide to raise rates before year end, 55% expect a hike versus 45% for no hike. While it is not far from a 50/50 call it still suggests a higher degree of conviction among Nordic market players that rates will be raised compared to market pricing which indicates some 40% probability for a hike in 2019. Danske Bank expects 25bp already next week.
Riksbank. Nordic investors and corporates have no clear view as to whether the next move from the Riksbank is a hike or a cut. 50% of respondents lean towards what is communicated by Mr Ingves and 50% share our view that the next move is a cut. Comparing this with market pricing which indicates -8bp by April 2020, our clients are more hawkish. Here we note some interesting differences between countries: 60% of Swedish and 86% of Norwegian clients expect a hike, whereas 80% of Finnish clients expect that the next move from the Riksbank is a cut. Hence, Danske Bank finds itself in the Finnish camp, expecting a 25bp rate cut in February 2020.
EUR/SEK. For the first time ever in the history of the FX Thermometer and after 23 consecutive quarters of projecting a lower EUR/SEK (most often with a poor outcome), Nordic market players expect a weaker SEK this time. The average 3M (NYSE:MMM) forecast is 10.71, which is 0.6% higher than current 10.65. Both Swedish (10.71) and Finnish respondents (10.75) have a bearish view on the SEK, whereas Norwegians expect that EUR/SEK will drop (10.51). Danske Bank sees EUR/SEK at 10.80 in 3M.
