September CPI triggers Riksbank response

Admittedly, we have not ranked among those who have taken a bet on another rate cut by the Riksbank but rather argued for longer a stay-on-hold scenario (until summer 2016). True, the ECB eased and announced asset purchases after the latest Riksbank policy meeting. The reason we have not seen another rate cut as an interesting enough case is that our inflation forecast has not deviated from the Riksbank’s projection in any meaningful way. Inflation is now obviously at the core of the Riksbank’s thinking.

One of the perceived doves (Ekholm) has left the board and it is not clear if a new board member will be appointed before the next policy meeting (27 October with the policy announcement the day after). Nevertheless, many other board members (Flodén, Jansson, Skingsley and also af Jochnick) have expressed readiness to act again if inflation drifts away from the target again (or if the economic deteriorates). To ensure that inflation moves back towards the target is the prime objective.

The September CPIF outcome (0.3% y/y) is 0.4 percentage points below the Riksbank’s projection. That is a lot. However, more importantly, the September data shows considerable softness in almost all goods and services components. Seasonal price increases in clothing and shoes are much lower (after a high August reading though). A few other ‘downside’ factors include food, furniture and household equipment, health services, cars, recreation and culture, transport services.

We have two other observations. First, services price inflation (excluding housing), which popped up in April from a cyclical low the month before, has in recent months not been able to come up any further. Goods inflation is back in negative territory. Second, the krona – the trade weighted KIX index was 6.7% weaker in September than a year earlier. Imported inflation showed some tendencies to move higher earlier this year but more recently that seems to have stopped. Imported inflation was -1.0% y/y in September.

So, yes, probabilities have moved in favour of a rate cut and possibly a further postponement of future hiking plans (currently starting late next year). So, the question is how much? It is no longer a matter of moving in steps of 25bp. The ECB has mentioned that its refi rate level (5bp) in practice is equal to the zero-bound level. It is possible that the Riksbank wants to avoid getting to the zero bound rate and decides to go for 15bp down to 0.1%.

We keep our recommended positions, at least for the moment. However, the combination of being long BEI 3102 and receiving SEK 2Y2Y has naturally been hit today and we advise to add more risk to the swap in the position. The 5s10s curve flattener has suffered one basis point but as the 5Y point (0.40%) gets lower, the position should benefit amid lower interest rates going forward. The 10Y ASW is moving sideways whereas the FRA spread has flattened a tiny half basis point.