Marketing communication This report has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Nordea Markets may have positions in the mentioned financial instruments. SEK rates: A lower bound on rate hike discounting Mats Hydén Chief Analyst +46 8 407 91 04 [email protected]2 December 2021 Completion timestamp: 2 December 2021 14:30 CET Dissemination timestamp: 2 December 2021 15:00 CET
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Marketing communication
This report has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and is not subject to any
prohibition on dealing ahead of the dissemination of investment research. Nordea Markets may have positions in the mentioned financial instruments.
Dissemination timestamp: 2 December 2021 15:00 CET
ConfidentialThis report has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Nordea Markets may have positions in the mentioned financial instruments.
Marketing communication
2
SEK rates: Temporary drivers of inflation pile up, uncertainty is high
2. But one should remember that Swedish energy prices are increasingly linked to
European prices through new power cables. The recently reduced Swedish nuclear
capacity has also reduced residual electricity production capacity. And financial futures are
poor forecasters around regime shifts: look at oil futures in the 2007-08 cycle…
1. The Swedish spot electricity prices reached all-time highs recently with a rise of more than
500 % compared to just a month ago. The seasonal icing of the big rivers, little wind, cold
temperature are some driving factors. Futures point at close to normal prices for 2022. Nice.
3. European energy price increases may be enough to create measurable second-order
effects in Euro consumer prices that will in turn influence Swedish consumer prices. Surely it is
too early to dismiss the higher than expected inflation turn-outs as temporary.
4. And can one be sure that even the weather is temporary? The relationship between low
and high pressures over the North Atlantic indicates a cool period for northern Europe. The
rowanberries where plentiful this autumn, do you remember? Winter is coming…
ConfidentialThis report has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Nordea Markets may have positions in the mentioned financial instruments.
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SEK rates: Too early to dismiss domestic inflation risk as well
2. And it is not just about energy prices, demand-driven inflation is another likely driver. A
red-hot economy, low unemployment and extra-ordinary cash-rich households and
corporates. It cannot be that hard to increase prices?
1. According to Nordea’s current forecast inflation will be significantly below the 2 %
target in two years time. But in the near-term, a stretch of rather high m/m numbers lies
ahead. Until the momentum in prices recedes, can you really dismiss inflation risks?
3. In H2 2022, the central wage negotiations will start (to be finished around end of Q1 2023). Chart
below shows wage growth and inflation according to the Riksbank’s forecast. By the end of the next
wage deal (2026), employees will look back at real wage growth < 1%, for more than 6 years. Will
they be happy? Will they feel boosted to take-on climate change through higher energy prices? If
not: there should be upside risk to wages in the years ahead…
4. Households are indeed feeling the heat of liquidity pumped up, supply disrupted
economy. Inflation expectations are at record levels. Will they be happy to take-on climate
change through record low real wage growth? And are inflation expectations around 6%
even anchored? Who would protest against a green booster shot to wages in 2023?
ConfidentialThis report has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Nordea Markets may have positions in the mentioned financial instruments.
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Duration: A scenario for a lower bound to policy rate discounting
1. Assume that the Riksbank will revise its rate forecast in the same way it did at the
November meeting. The start of the “hiking cycle” will be moved two quarters at each
meeting. A rate hike by late 2022 and early 2023 will then be in play by September.
3. Bias on duration Economic surprises have been trimmed, reflecting less optimistic
expectations. Inflation momentum remains high while the outlook for economic activity is
more muted. We map the policy decision by the Riksbank as shift in forward guidance to the
less dovish side. Risk-aversion has flared up and volatility is on the rise. Our duration bias
process does not allow a short bias under elevated equity market volatility, unless… we
judge realized global inflation to be above a certain threshold. Currently, the risk-aversion
switch is still active (inflation in Euro and Sweden must be higher for longer for it to be
inactivated).
2. The scenario below is in our view a reasonable estimate on a “lower bound” for rate hike
expectations, as long as hike expectations are reasonable at all (they will not be reasonable if
there is a 20% omicron plunge in the stock market for sure!). So there is still value in
receiving the SEK front-end, but one should in our view not expect roll-down according to a
policy rate path at zero for three years.
FRA Mkt Scenario TED
DEC21 -0.12 -0.12 -12
MAR22 0.03 0.00 0
JUN22 0.10 0.01 0
SEP22 0.18 0.05 0
DEC22 0.23 0.05 -10
MAR23 0.38 0.22 0
JUN23 0.48 0.29 0
SEP23 0.56 0.36 0
DEC23 0.60 0.32 -10
MAR24 0.72 0.48 0
JUN24 0.80 0.54 0
SEP24 0.84 0.61 0
ConfidentialThis report has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Nordea Markets may have positions in the mentioned financial instruments.
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Trade Ideas: If the front-end is right on hikes, real yields should increase in 2022
3. Relative value trade ideas
1. Real yields As spot inflation keeps surprising on the upside while nominal
yields are decreasing, real yields keep plummeting. If real yields are interpreted
as the total impact of monetary policy in a country, Sweden is still engineering
one of the most expansionary monetary policies on the planet. No wonder the
SEK has a hard time strengthening (!). But target inflation is way above 3%,
households expect inflation around 6%, unemployment are lower than normal,
resource utilization significantly higher than normal, manufacturing sector is
roaring, asset prices are around all time high etc. If inflation turns out just a tiny
bit higher, cannot policy be turned a tiny bit tighter? Policy ultimately drives real
yields. It may take many months. But higher real yields in 2002 have short odds.
2. Slope The yield curve continues to price a near-term but limited response to
higher inflation. The 2/5s curve is consistent with 2-3 hikes in the coming years,
but then the economy is expected to tank, flattening the yield curve markedly in
forward space. That curve slope on longer tenors, like 5/10s, reflects a
“premature”, brief hiking cycle makes perfectly sense to us, but on shorter tenors
the early forward flattening is less obvious. If markets get more spooked by higher
and more persistent inflation than previously thought, then more curvature
2/10/10y+ on the yield curve may be the next step: steepening 2/5s in forward
space, 5/10s in spot space but flattening further 5/10s in forward space. Hmm,
playing curve slopes continue to be a complex matter.
ConfidentialThis report has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Nordea Markets may have positions in the mentioned financial instruments.
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References: Publications year-to-date
Swedish interest strategy publications year-to-date:
25-Nov-2021 THURSDAY1500: A monetary policy plumber uses two tools
22-Nov-2021 SEK linkers: Inflation x-factor cannot be checked yet
18-Nov-2021 THURSDAY1500: Riksbank’s not turning yet
11-Nov-2021 THURSDAY1500: Lower Swedish inflation-risks than in other markets
4-Nov-2021 THURSDAY1500: The business cycle never sleeps
3-Nov-2021 SEK covereds: Supply update October
28-Oct-2021 THURSDAY1500: The Riksbank’s SEKret weapon