Riksbank in Focus

Market movers today

The key event today in the Nordic region is the Riksbank decision, where we expect a 75bp hike of the policy rate to 1.50% and a policy rate path signalling more near-term rate hikes (we expect 75bp again in November), for more details, please see the Nordic section below.

The German producer price inflation may stabilise, but at very high levels with energy continuing to the big inflation driver.

In the US, the building permits and housing starts for August will provide important signs of how fast the US housing sector is slowing amid higher interest rates.

The 60 second overview

Markets: Global risk sentiment took a turn in thin trading yesterday and stock market closed the session in green in the US. Asia is also recovering, and after a five days losing streak in most European indices, futures point to a session of relief. Overall, markets remain choppy ahead of the flurry of central bank meetings later this week. The US 2-year yield is creeping towards 4% while the 10-year is closing in on 3.5%. After this week’s hike (75bp widely expected but 100bp also being possible), the fed funds rate will have reached a restrictive territory. The markets now price the peak hiking cycle at 4.5%.

Japan: Japanese inflation data is not usually something to watch out for, but with a BOJ meeting coming up on Thursday and pressure on its yield control curve policy rising, price data this morning drew some attention. The BOJ’s preferred measure, inflation excluding fresh food, increased to a three-decade high at 2.8% y-o-y, topping analyst expectations at 2.7%. We expect the BOJ to stay put as inflation continues to be largely driven by energy and food prices. Yet, it is worth noticing that also the core measure increased from 0.4% y-o-y in July to 0.7% in August and the falling yen is adding to inflation pressures with the USD having gained 25% against JPY this year.

China-US: In the clearest signal yet, US President Biden said yesterday the US would defend Taiwan if attacked – moving one step further towards China’s ‘red line’. This is the fourth time in about a year that Biden sends this message despite White House officials every time stating afterwards that the US has not changed policy. However, this time the journalist asked further if it meant that unlike in Ukraine, US forces – American men and women – would defend the island, Biden replied “yes”. This is the clearest signal that the US has shifted policy to so-called ‘strategic clarity’ away from ‘strategic ambiguity’ and this is likely to infuriate China. Beijing will see this as one step closer to formally supporting Taiwan independence and in that sense we have moved one step closer to China’s red line of a formal declaration of Taiwan being a sovereign state. We expect China to respond with a further very high level of military exercises around Taiwan. We still do not expect the US and Taiwan to cross the ‘red line’ by formally declaring independence for Taiwan but moving as close as possible to the ‘red line’ also entails risks and we do see a 20% probability a war could be triggered by mishaps or errors that lead to a tit-for-tat spiral.

FI: With UK out, European rates markets were driven by hawkish comments from ECB GC members amid thinly volume trading. European curves bear-flattened, while spreads were broadly unchanged on the day. 10y bunds rose 5bp yesterday.

FX: FX is in waiting mode ahead of seven (including Turkey that is) important central bank decisions this week. EUR/USD stayed close to parity. GBP, NOK and SEK edged slightly lower, though NOK erased some of its losses amid a late rebound in equities and crude oil. US 10Y temporarily reached 3.50% which gave temporary support to USD/JPY.

Credit: With UK markets closed to mark the Queen’s funeral there was no trading in iTraxx indices yesterday. Today, trading commences in the new iTraxx series (series 38). Based on Friday’s levels, we estimate the roll should take Main 7-8bp wider (almost exclusively due to index extension) while Xover should open c.40bp wider on a combination of extension and constituent change.

Nordic macro

Today we have the Riksbank kicking off this very important central bank week. We expect a 75bp hike of the policy rate to 1.50% and a policy rate path signalling more near-term rate hikes (we expect 75bp again in November). Market pricing is for a more hawkish Riksbank today, pricing in around 90bp. While a 100bp hike cannot be ruled out, we do not find last week’s inflation print or inflation expectations survey to be enough to flip our base case from 75bp to 100bp. We also expect the Riksbank to reduce QE reinvestments further, where we find it reasonable with a complete stop of reinvestments (reducing to a marginal amount just to keep a presence in markets is also an option). The Monetary Policy Report with new projections will be released in conjunction with the decision at 9.30 CET. Governor Stefan Ingves will hold a press conference at 11.00 CET (in Swedish). The policy rate becomes effective Wednesday 21 September.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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