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SEB sees 25 per cent chance of Riksbank cut
 

SEB sees 25 per cent chance of Riksbank cut

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SEB’s experts see a 25 per cent chance the Riksbank will cut its repo rate by 25 basis points to 1.25 per cent at Wednesday’s rate decision. An investor survey done by SEB shows only 8 per cent of ...

SEB’s experts see a 25 per cent chance the Riksbank will cut its repo rate by 25 basis points to 1.25 per cent at Wednesday’s rate decision. An investor survey done by SEB shows only 8 per cent of respondents foresee a rate cut and in an internal survey among SEB’s own fixed income traders and experts, 18 per cent says they believe the rate will be cut. The alternative to a cut is an unchanged repo rate.

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    SEB sees 25 per cent chance of Riksbank cut SEB sees 25 per cent chance of Riksbank cut Presentation Transcript

    • AHEAD OF SEB internal survey:THE RIKSBANK Repo rate and expected market reaction Trading Strategy www.seb.se/research
    • Key points for April 18Market pricing as of Apr 16, 16.00 CET vs. Riksbank’s current (Feb) rate path  End-2012: Market 1.19% vs. Riksbank 1.50%  End-2013: Market 1.36% vs. Riksbank 2.12%  End-2014: Market 1.62% vs. Riksbank 2.90%SEB internal survey: FI & FX trading and sales expect…  82% of respondents expect an unchanged repo rate, 18% expect a 25bps rate cut in April  If an unchanged repo rate: Up to 10bps higher 2y yield, 2-6 fig lower EUR/SEK  If 25bps cut: 7-12bps lower 2y yield, 4-7 fig higher EUR/SEK (full results on next page)  Avg respondent expects a repo rate of 1.27% in end-2012 (min 1.00%, max 1.75%)SEB investor survey: Domestic investors expect…  92% of respondents expect an unch repo rate while 8% expect a 25bps rate cut  Rate decision is regarded as much more certain than that in Feb and Dec  Average respondent expects the Riksbank to maintain the repo rate unchanged  Note that the investor survey was conducted between Mar 28 and Apr 2SEB Research expects…  Main scenario (75%): Unchanged repo rate and the rate trajectory  Dovish scenario (25%): 25bps rate cut and no indications of further rate cuts  For details of the investor survey and our views, see Fixed Income Insights, Apr 4 (click here) and Apr 12 (click here) 2
    • SEB internal survey: Expected market reaction with different repo rate decisions and rate paths Riksbank rate path indicates a repo rate in December 2012 at: Rate 1.13% 1.25% 1.38% 1.50% If unchanged repo rate chg on =same as Apr 18: in Feb  2y yield to increase Unch 2y yield: 2y yield: 2y yield:  Stronger krona at Not -1bps +4bps +10bps 1.50% relevant EUR/SEK: EUR/SEK: EUR/SEK: -2ig -4fig -6fig If 25bps rate cut 25bps 2y yield: 2y yield: cut to -12bps -7bps Not Not  2y yield to decline 1.25% EUR/SEK: EUR/SEK: relevant relevant  Krona to weaken +7fig +4fig Results based on an internal survey within SEB FX and FI trading and sales on Apr 16. 2y benchmark yield (SGB1041 2014) ref 1.06%, EUR/SEK ref 8.892012-04-16 | AHEAD OF THE RIKSBANK 3
    • Current repo rate path: Market vs. Riksbank Current market pricing implies a 16bps rate cut on Apr 18 Market Riksbank SEB Market vs. Effective pricing Feb 2012 forecast date Repo chg Repo chg Repo chg RB SEB 2012-04-16 1.50 1.50 1.50 Riksbank repo rate (%) 2012-04-25 1.34 -16.0 1.50 0 1.50 0 -16 -16 3.50 3.50 2012-07-11 1.22 -12.5 1.50 0 1.25 -25 -29 -3 2012-09-12 1.19 -3.0 1.50 0 1.00 -25 -32 19 3.00 3.00 2012-10-31 1.19 0.0 1.50 0 1.00 0 -32 19 2.50 2.50 2012-12-19 1.19 0.0 1.50 0 1.00 0 -32 19 2013-02-13 1.20 1.5 1.50 0 1.00 0 -30 20 2.00 2.00 2013-04-17 1.23 2.5 1.57 7 1.00 0 -35 23 2013-07-03 1.26 3.0 1.71 14 1.00 0 -46 26 1.50 1.50 2013-09-04 1.29 3.5 1.85 14 1.00 0 -56 29 1.00 1.00 2013-10-23 1.33 3.5 1.98 13 1.00 0 -66 33 2013-12-18 1.36 3.5 2.12 14 1.00 0 -76 36 0.50 0.50 04/12 07/12 10/12 01/13 04/13 07/13 10/13 01/14 04/14 07/14 10/14 01/15 2014-02-12 1.40 4.0 2.29 17 -89 2014-04-16 1.44 4.0 2.42 13 -98 2014-07-02 1.48 4.0 2.57 15 -109 Riksbank (Feb) SEB f/c Mkt pricing 2014-09-03 1.53 4.5 2.71 14 -119 2014-10-22 1.57 4.5 2.80 9 -123 2014-12-17 1.62 4.5 2.90 10 -129 2015-02-18 1.66 4.5 3.05 15 Note: Levels as of Apr 16, 16.00 CET2012-04-16 | AHEAD OF THE RIKSBANK 4
    • What has happened since Feb 16? Compared to Riksbank Rate path SEB research: What February Monetary Policy Update CPI inflation Both CPIF (1.1%) in line with  Riksbank’s macro view Inflation Riksbank’s forecast in March, CPIF ex energy slightly lower Household expectations  Expectations increased to 2.8% in March; Prospera expectations stable. Labour market Largely in line with the  Riksbank forecast; both employment and unemployment slightly lower. Employment indicators only moderately lower. GDP Q4 GDP significantly below  Riksbank forecast. Household Retail sales rising and car  demand registrations stable. Consumer confidence recovered, moving higher. Industry Weak exports behind Q4 GDP,  but some recovery in Q1. Major recovery in manufacturing sentiment according to NIER, PMI above 50 in February. Very weak orders and production in February Housing prices House prices have levelled out  / credit growth or even increased slightly according to some measures. SEB housing price indicator well above zero. Global economy PMIs and sentiment indicators  / global have stabilised in the Euro- monetary policy zone and signal growth in the US. Some downside revisions to consensus growth estimates for the Euro-zone but slight upgrades for the US. Financial Stock markets strong and lower  conditions: stock credit spreads. Sovereign market /credit spreads mixed but some improvement in Spain and Italy. Markets turbulence has returned in last 1-2 weeks Financial SEK (TCW) in line with  conditions: SEK Riksbank Q2 forecast. Mortgage spreads have2012-04-16 | AHEAD OF THE RIKSBANK tightened. 5
    • Short-term fair value model vs. EUR/SEK SEB research: EUR/SEK EUR/SEK EUR/SEK reaction to the Riksbank rate decision is skewed to the downside given the market pricing for a rate cut. Having said that the interest rate market moved very quickly from low to high rate cut probability following the poor industrial production number last week and the more negative global environment for risk appetite. Overall the range in EUR/SEK 8.78/98 is probably intact and we continue to hold a short trading recommendation in EUR/SEK. We expect EUR/SEK to decline on unch rates. Riksbank forecasts EUR/SEK to move down towards our own long-term fair value estimate at 8.50 during the TCW Index and Riksbank forecast coming 12 months. Hence at the current level, SEK is not a Riksbank expects EUR/SEK towards 8.50 Q1-13 factor in any direction for monetary policy. 155 12.0 150 11.5 Corporates continue to hold large FX deposits indicating 145 11.0 they have changed their FX hedging behavior. We would EUR/SEK 140 10.5 Index expect parts of theses funds to be repatriated should SEK 135 10.0 weaken materially beyond 9.00 vs. the euro. 130 9.5 Our 1m, end-Q2 and end-2011 EUR/SEK forecasts are 8.80, 125 9.0 120 8.5 8.65 and 8.50 respectively. Given that EMU risks are on the 115 8.0 agenda again (Spain), the risk is that our anticipated SEK 05 06 07 08 09 10 11 12 13 14 appreciation takes longer to materialize and that SEK weakens vs. the USD. TCW (Riksbank fc) EUR/SEK 2012-04-16 | AHEAD OF THE RIKSBANK 6
    • Investor survey: 92% expect the RB to remain on hold and maintain an unchanged repo rate path on Apr 18 92% believe the Riksbank will remain on hold on April 18 while remaining 8% expect it to cut by 25bps. The upcoming rate decision is thought considerably less uncertain than the February outcome (note: survey conducted between Mar 28 and Apr 2, i.e. before weak industrial production data) Most respondents (80%) expect further reservations by both Ekholm and Svensson or by Svensson alone (20%) Survey expectations for Feb rate path Difference expected repo path by YE12 and YE13 vs.3.50 market pricing 2003.00 Diff 2012 exp path vs. market pricing 180 Diff 2013 exp path vs. market pricing 1602.50 1402.00 120 1001.50 801.00 60 400.50 20 00.00 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Dec-12 Dec-13 Dec-14 Market pricing Exp path Apr survey Riksbank (Feb)2012-04-16 | AHEAD OF THE RIKSBANK 7
    • Investor survey: 36% expect the Riksbank to cut by end-July Some 36% of respondents expect the repo rate to stand at 1.25% by end-July. Average expected repo rate by end- July of 1.41% (cf. 1.29% in our February survey). By the end of this year, on average the repo rate is expected to stand at 1.39% (cf. 1.20%). We note that as many as 52% expects and unchanged repo rate at 1.50% by year-end. Expected repo rate YE 2012 52% 32% 24% 20% 16% 16% 8% 8% 8% 4% 4% 4% 4% 0.25 0.5 0.75 1 1.25 1.5 1.75 2 2.25 2.50 April survey February survey2012-04-16 | AHEAD OF THE RIKSBANK 8
    • Investor survey: Riksbank board regarded as more hawkish New board deemed as hawkish as the old board in December Market hawk-o-meter for the Riksbank Scale 1 (dovish) to 7 (haw kish) 6 5.3 5.1 5 5 4.2 4.3 4.3 4 3.9 4 3 2.4 2 2 1.8 1.8 1 0 Svensson Ekholm af Jochnick Jansson W-Parak Ingves April February2012-04-16 | AHEAD OF THE RIKSBANK 9
    • Investor survey: Domestic risks have decreased Market ranking of Riksbank drivers 15 10 5 0 -5 -10 -15 -20 Apr -25 Feb -30 Sw edish Sw e Stock Bank ECB Sw e Sw e Global krona housing market stress monetary inflation grow th grow th market policy2012-04-16 | AHEAD OF THE RIKSBANK 10