The Swedish Riksbank yesterday surprised markets by cutting the repo rate to -0.10%. The Executive Board also decided to start buying government bonds by an amount of SEK 10bn. We expect more monetary easing to be in the pipeline and the Riksbank to cut the repo rate to -0.20% in April.
After long negotiations in Minsk a deal was finally reached by the leaders of Germany, France, Russia and Ukraine yesterday. The deal includes a ceasefire that will come into effect on 15 February. Markets reacted positively to the results of the Minsk deal, however, there is still a lot of uncertainty.
In the UK, the BoE revised down the inflation forecast for 2015 in its February Inflation Report, supporting our view that the first rate hike is still distant. The downward revision was mainly because of much lower CPI inflation outcomes due to the sharp falls in oil and food prices. We continue to look for lift-off in BoE rates in Q4 this year.
In the US retail sales barely rose in January, with core retail sales edging up by 0.1%, suggesting a soft start to spending this year.
Day ahead
Today’s most important data release is Q4 GDP figures for the Euro area. We expect Euro-area GDP to have grown by 0.2% q/q in Q4, as in Q3. We consider the main risk of our forecast to be on the upside.
With the increased focus on inflation expectations in the US, Friday’s University of Michigan consumer survey should be monitored closely. In January 5-10Y inflation expectations were unchanged at 2.8% after dipping to 2.6% in November.
Rates
Following the actions of the Riksbank Swedish rates declined steeply. The 5-year broke new ground, moving into negative territory. A fall of 18 bp resulted in the 5-year ending at -2bp.
As headlines indicated that a Greek solution was within reach, rates across maturities declined all over Europe, and in Greece they fell massively.
A fall of 42 bp meant that the Greek 10-year once again was below the “magic” 10% level. Looking at the shorter maturities, the Greek 3-year yield declined massively with 260 bp, ending at 17,4%.
Disregarding Greece, euro rates fell between 1 and 10bp. The long end of the curve declined more than the short end, resulting in a flattening of the curve, and the peripheral rates declined more than core/semi-core rates. The very short end of the curve (2-year maturities) was close to unchanged.
US rates also saw modest declines with the 10-year falling below the 2% mark (ended at 1.98%).
Euro swap rates were close to unchanged and only looking very closely you would spot a very modest decline (1bp). Likewise in the US.
FX
The EUR gained and the USD was on the back foot yesterday as the ECB let Greek banks borrow more money via emergency facilities (ELA) while US data on the whole disappointed. Today’s data offering includes US consumer sentiment, in which the inflation expectations component will be scrutinized. Should inflation expectations deteriorate, which we do not believe, the USD will come under further pressure in the coming days.
The Riksbank surprised on the soft side yesterday, undermining the SEK distinctly. When the Riksbank surprised the markets in July and October last year, the SEK started to gain versus the EUR soon after. This time around, however, the Riksbank’s opening of Pandora’s monetary toolbox makes such an outcome less convincing.
The NOK gained only modestly versus the SEK yesterday, probably reflecting a market that is growing a bit tired of trying to push the NOK stronger. Norges Bank may also be becoming a negative tail risk for the NOK, since the currency is now roughly in line with levels predicted by Norges Bank in December.
The GBP on the whole gained yesterday after hawkish comments from Bank of England Governor Carney, who noted that wages and unit labour costs are beginning to pick up. While there are good grounds for expecting the GBP to strengthen versus the EUR, the May election is a good argument for being cautious.
Nordea