50bp Riksbank Hike Could Entice EUR/SEK Back Above 11.0

Summary

• The Riksbank hiked the policy rate to 1.75% (+100bp) at their September meeting, faster than the market had expected but a risk we had outlined. Meeting minutes showed the board was split.
• Since the last meeting, core inflation has proven stronger than expected but will contend with mounting weak data points and surveys.
• We think the case for a 50bp marginally outweighs that of a 75bp hike (4-3) and, therefore, lean toward a 50bp Riksbank hike tomorrow.

Market Implications

• A 50bp hike would encourage EUR/SEK back above 11.0

Introduction

The Riksbank hiked the policy rate to 1.75% (+100bp) at their September meeting, faster than the market had expected but a risk we had outlined – read our Riksbank review and our take on the meeting minutes. They also released updated forecasts including 75bp of further hikes on the back of 7.8% CPIF through 2022 and -0.7% GDP through 2023, taking the terminal rate to 2.5%. At the time, we thought 50bp would follow in November, and we still do. However, 75bp is a live risk.

Costs Are Accelerating, But There Is a Limit

Recent core inflation data suggests the Riksbank ought to hike by 75bp, but a weaker labour force, falling inflation expectations, worsened Business outlook and high household leverage suggest a 50bp is in order. We weigh the argument for both sides:

Labour Force: (+1) Doves 1-0 Hawks

The October labour force update is favourable to the doves. Employment (69%) remained strongly below forecast (69.3%), despite the recent upturn. Meanwhile, unemployment (7.7%) shot above forecasts (7.3%).

Inflation: Doves 1-1 Hawks (+1)

CPIF (9.3% YoY & -0.1% MoM) undershot Riksbank forecasts (9.8% YoY), down from 9.7% YoY in September (Chart 3). Meanwhile, the Phillips curve suggests downside is likely in future inflation prints (Chart 4). However, attention should be directed toward the higher-than-forecasted core-CPIF (7.9% YoY vs 7.4% YoY; Chart 5). Moreover, any sign of a top failed to come. The hawks win this round.

Inflation Expectations: (+1) Doves 2-1 Hawks

Doves edge a win when we look at inflation expectations. Indeed, adding to a (likely) momentary turn in CPIF YoY, 1Y money market inflation expectations failed to push any higher while 2Y money market inflation expectations have turned sharply (Chart 6). 5Y inflation expectations have remained anchored.

SEK: Doves 2-2 Hawks (+1)

A strong point for the hawks of the Board. While SEK has spent the majority of its time being weaker than expected, this is not the interesting revelation (Chart 7). The Riksbank Business Survey revealed that retailers had issues in raising prices at the pace of a depreciating SEK!

Survey Data: (+1) Doves 3-3 Hawks (+1)

And on the Riksbank Business Survey, there were three key takeaways that were broadly beneficial to either side of the argument:

1. Costs are accelerating, but there is a limit.
   • The survey showed that two-thirds of price setters are raising prices more than normal. Moreover, of those planning to raise prices within the next year, 90% said they would raise them at a faster pace than normal. Incredibly, one issue retail has had is to raise prices in keeping with a depreciating SEK!
   • Not everything was bad news, however. Notably, respondents were uncertain if services could continue to pass on costs at the same pace as they had been, a certain
2. The economy is slowing.
   • Another point to the doves. The economy is slowing, and the respondents are becoming more concerned with future expectations. This is despite disruptions in output, and/or problems in delivering products, easing.
3. A wage-price spiral is unlikely.
   • ‘The Swedish [wage formulation] model will be preserved. This is in everyone’s interests.’ Swedish wages are (mostly: 88%) formed using central wage agreements, which are due to be reviewed at the turn of the year – typically completed in Spring.
   • In short, confidence remains in the Swedish wage formation model. 60% say wages are moving normally. The risk comes around ‘specialists’ who, from the survey, appear to be pushing any potential wage drift (Chart 8).

Leverage: (+1) Doves 4 – 3 Hawks

Assisting the doves in their argument is the inbuilt household leverage – we summarised the Riksbank’s multiple articles on it in the last review. But, in short, a 1pp increase in the policy rate means that consumption will slow around twice as much as it would have done 15 years ago. In other words, fewer hikes are now needed for the same tightening.

Market Implications

Focusing on FX, EUR/SEK has traded well with German-Sweden rate spreads through the latter half of the year (Chart 8). On the German side of the rate spread, Henry expects a 75bp ECB hike in December and continued EGB weakness ahead. Meanwhile, on the Sweden side of the rate spread, a potential 50bp Riksbank hike poses an immediate threat to 2Y yields. Thus, a smaller 50bp hike could see EUR/SEK return above 11.0. The Swedish Krona has also correlated well with equity strength (weakness). We remain of the mind that the bear market is far from over which will continue to contribute to SEK weakness (Chart 9). A break through 11.0 leaves EUR/SEK open to 11.10, or even 11.67 – the all-time high (Chart 10).

Ben Ford is a Researcher at Macro Hive. Ben studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)