Sweden: Riksbank moves early and starts the cutting cycle

Fixed income: The May cut was priced to some 80%, and hence the market reactions have so far been fairly muted, with front-end FRAs outperforming EUR by some 3-4bp. The June meeting is now priced for 8bp, which seems reasonable in our view. Further out, we believe the market is pricing too gradual cuts and that the risk/reward is for more cuts looking into 2025. We continue to look for lower front-end pricing and relative steeper curves.

Macro: Overall, the monetary policy update contains surprisingly much discussion (disproportionately much in our opinion) regarding the strong economic outlook in the US. They acknowledge that the Swedish GDP-indicator for Q1 was low, but according to their forecast. However, they forecast increased growth going forward given higher real wages, increasing optimism among household and stronger expected business activity moving ahead. Unemployment in Q1 (8,3%) was somewhat higher than they expected, and they perceive that all indicators point towards an increase going forward. It is welcome that they refer to the Q1 number instead than the highly volatile monthly statistic. Even other indicators that they highlight such as newly registered job openings, redundancy notices and bankruptcies do all not look too promising. We still think they give an unjust representation of the Swedish labour market and underestimate how it will contribute to growth moving ahead. The unemployment should be interpreted as capacity measure which currently increases due to inflows from the non-labour force rather than from lower employment. Employment on the other hand remains stable, moving sideways while hours worked rises, which in our view are more important when gauging the economic outlook. This as employment is more connected to the income side of the economy and hours worked to the production side.

Regarding the domestic inflation outlook, they basically deem that everything looks promising as the March outcome was much lower than their forecast. They state that prices of both goods and services increased more slowly than expected in March. It is worth highlighting though that it is not entirely true as the service inflation in March (4,8% YoY) was equal their forecast for the subindex.

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