Tue, May 30, 2023 @ 07:36 GMT
HomeContributorsFundamental AnalysisA Dovish 50bp Rate Hike from the Riksbank

A Dovish 50bp Rate Hike from the Riksbank

Market movers today

Preliminary Q1 GDP data will be released for Sweden and the US today. Consensus is looking for a small contraction for the former (-0.1% q/q), and moderating yet still fairly solid growth for the latter (+2.0% q/q AR).

Euro Area Economic Sentiment Indicators will be released for April, the flash consumer confidence index released earlier showed a modest uptick in sentiment.

Consensus expects the Central Bank of Turkey to maintain rates unchanged in its meeting today.

Overnight, we also expect the Bank of Japan to keep its monetary policy unchanged. See more details from our Bank of Japan Preview, 21 April.

The 60 second overview

Bank turmoil: Concerns over the regional banking sector and specifically First Republic Bank continued yesterday and sent global equities lower in a risk off mode which continued in the overnight Asian session.

Sweden: The Riksbank hiked rates as expected by 50bp to 3.50%, but the signals for future policy was dovish, signalling for less than another 25bp hike in either June or September, clearly lower than market pricing heading into the release. Anna Breman and Martin Flodén dissented against the decision, opting for a 25bp hike instead and a rate path signalling for additional 25bp hikes in June and/or September. For now, we keep our 50bp call for June, but given yesterday’s release there is downside risk to our call. Given the signals, we would not rule out a scenario with 25bp in June followed by 25bp in Sep, see more in Flash comment Riksbank – Dovish hike, 26 April.

Geopolitics: Chinese leader Xi spoke with Ukrainian Prime Minister Zelensky yesterday for the first time since the Russian invasion. While it is too early to trade as a market theme, it should be seen as a positive sign, all things equal.

EU fiscal policies: EU Commission yesterday published an updated proposal on EU rules reform where the 3% and 60% of GDP reference values for deficit and debt remain unchanged. Countries will have to set out their fiscal adjustment paths, and the key variable for fiscal surveillance are now multi-year expenditure targets. The new framework is also accompanied by a more stringent enforcement regime: For countries that face substantial public debt challenges, departures from the agreed fiscal adjustment path will by default lead to the opening of an excessive deficit procedure. In the next steps the EU Council (heads of state) and EU Parliament both need to agree, before any new EU fiscal framework could come into effect. The deadline by year-end looks increasingly ambitious.

Equities: No news is no longer good news for markets! Lower volatility in bonds and equities is no longer enough to drive equities higher. Thereby, equities are duller in the lack of drivers, like yesterday. Strong tech reports were not really enough to lift equities on Wednesday. Europe and Nordics slumped, along with the US session where S&P eventually closed down -0.4%. Growth stocks outperformed, not due to yields but due to the turnaround in earnings. Otherwise, it was directionless trading with both cyclicals and defensives selling off. US futures are a notch higher today though.

FI: Yield curves steepened markedly yesterday with the front end 5bp lower while the longer end was 2-4bp higher across the jurisdictions. During the past two days, markets have taken 12bp out of the peak ECB policy pricing which has also led to a noteworthy inversion of the 2024 segment. After 10y Germany touched 2.5% on Monday, markets are now 10bp lower at 2.4%.

FX: The Riksbank hiked as expected yesterday, but left a dovish mark on SEK that lead to a rally in EUR/SEK above 11.40. It dragged EUR/NOK higher as well with the pair reaching a new high above 11.70. Broad USD sell-off sent EUR/USD briefly to the high end of the the range close to 1.11.

Credit: Overall a slightly negative tone in the corporate bond market fuelled by a negative tone in the overall equity market. iTraxx Main was 3bp wider while ITraxx Xover was 5bp wider. The Finnish nuclear power company TVO was upgraded to BBB-/Stable from BB+/Positive by S&P following the start-up of the commercial nuclear reactor OL3 which has been delayed for several years. We believe the upgrade was largely priced into spreads already. That said, we see the upgrade as positive as portfolio managers are likely to increase their exposure to TVO following the upgrade with TVO being included in IG benchmarks. Furthermore we expect that the markets will, over time, start to price in a chance of a further upgrade to ‘BBB’ in the medium term.

Nordic macro

Today, we get the Q1 GDP indicator in Sweden, which likely will be somewhat stronger than our forecast of -1.0% QoQ from Nordic Outlook. Somewhere in the area of -0.3% to -0.5% seems more likely given recent data releases. More interesting than the backward looking GDP data will be the forward looking NIER survey on businesses and households. Sentiment is likely to improve, although consumer confidence is likely to remain at very low levels. Retailers’ price plans will also be in focus as these remain elevated despite other indicators showing easing cost pressures.

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