Investment Research
30 May 2013
Reading the Markets Sweden •
Micro cycles
•
Macro cycle
•
Swedish long-end rates – now and tomorrow
Danske Bank Markets market view in a nutshell Segment
Tactical view (<3m)
Grade* Last update
Delta
Small longs
2
23/05-2013
Curve view
Curve flatteners
2
23/05-2013
2
16/05.-2013
We stay long Sweden vs Germany in the 10Y segment. We like Cross country sprds flattening the 2Y/10Y yield curve relative to the FRA curve.
Short-end (<2Y)
Neutral. Sell (Rec) RIBASEP13 as protection for our curve flatteners
2
23/05-2013
Index-linked bonds
No active trading recommendations, even though we suspect short-end BEI spreads trade cheap.
1
16/05-2013
Covered bonds
Buy 5y mortgage bonds vs. Govies. We recommend buying SWH186 vs SWH183 in a tail vs matching swaps.
3
10/01-2012
Swap Spreads
Neutral
1
Segment Delta Curve View Cross country sprds Repo rate
Strategic view (3-6m) Higher rates Neutral Neutral 3m 1.00%
2 1 1 6m 1.00%
14/03-2013
Last change 28/02-2013 18/04-2013 23/05-2013
12m 1.00%
* Grade of conviction 1-3. 3 = strongest.
Source: Danske Bank Markets
Strategy/Macro Michael Boström +46 8 568 805 87
[email protected] Strategy/Quant Marcus Söderberg +46 8 568 805 64
[email protected]
Important disclosures and certifications are contained from page 10 of this report.
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Reading the Markets Sweden
Micro cycles A rather annoying observation we have made is that the business cycle for some time seems to have got stuck in a sort of micro cycles without being able to find any sustained direction. For Sweden we monitor 17 main groups of economic indicators covering everything from surveys, labour market indicator the consumer sector and credit, to name a few. Recent data suggests that these data have followed mini-cycles of about 3.4 months. For instance, late last year, a large majority of data weakened. Later, during the first months of this year the opposite was the case. In particular, February data showed an overweight of 75% for improvement. Available figures for April-May again show a tilt towards weakening. Note, we are not talking about a slump but rather a softening tendency. We have had a hard time understanding the Riksbank lately and we do admit that we do not have a very strong conviction about what it will do next. But for what it is worth we guess that softer data of late has increased the probability of another rate cut. So what about first quarter GDP then? We commented on that in a special paper yesterday, so we will keep it short here. We severely underestimated the extent to which cold weather would push consumers’ energy consumption higher. But even excluding that factor, consumer spending was somewhat better than we thought. Most other things were, in our view, pretty bleak (but more in line with forecast). Businesses’ capital spending slumps and exports continue to decline. Working hours fell by almost 1% That is not a good sign. OK, what will the Riksbank make of this? Not evident, to be honest. We know that the RB’s forecast was a couple of tenths below the actual number but we do not have the breakdowns. What we do know is the RB’s full year forecast (including breakdowns) and that one requires a quite sharp acceleration from here for basically all demand components. But then again, we would assume that something of that kind is implied. So inconclusive is the word we would say. A couple of weeks ago, we mentioned that two things could be decisive for the Riksbank: the first quarter GDP and the Prospera inflation expectations survey that is released on 12 June. In a speech last week, deputy governor Jansson stressed the importance of meeting the inflation target within the (three-year) forecast horizon. The Riksbank’s current projection is that CPIF inflation is back close to two per cent from early 2015. The Prospera survey, however, concerns CPI or, more specifically, where people see the rate of inflation one, two and five years out. The most recent survey was published in March and the Riksbank’s forecast is from April. Still, one can compare what the Riksbank and ‘the public’ expects from inflation. Please note, though, that no questions are asked about inflation in a three and four year perspective, so in this case we have simply made a linear interpolation.
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Reading the Markets Sweden
The public distrusts the Riksbank’s ability to meet the inflation target
Source: the Riksbank, Prospera
Three things can be observed. Firstly, the public’s expectations about CPI are below the Riksbank’s both on a two and three year horizon – and by a lot. Secondly, average expectations remain slightly below the 2% target even five years out, that is to say two years beyond the policy horizon. Thirdly, public inflation expectations are lower also compared with the RB’s CPIF projection. We do not think that the Riksbank is very happy about this. It is a well established fact that shorter-term expectations are pretty strongly correlated to actual inflation. But we also suspect that the current low expectations even in a longer perspective also reflect the fight that has been going on within the RB about how much emphasis policy should have on inflation in relation to financial stability. This has given rise to a discussion whether the Riksbank indeed bothers less about the inflation target than before. Maybe this is why Jansson so clearly underlines that it is important to meet the target. To put it in another way, it is important to convince people that the target will be met and right now people are certainly not convinced – not even beyond the policy horizon. A further drop in expectations might therefore get considerable weight at the next policy meeting. So what would we do if we could set the policy rate? Well, from a pure business cycle point of view it is true that data have softened a bit, but not enough to make a rate cut a self-evident decision. But to the extent the important thing now is to re-establish credibility about the policy target, then yes, a rate cut is probably necessary.
Macro cycle To return to the first issue about a high frequency micro cycle, the problem is that this creates great risks of misinterpreting data. Therefore it is crucial – but very difficult – to have some thoughts about the macro cycle, where might we be heading in a 6-12 month perspective? US: In our minds, the US economy has behaved quite well given the fact that sequestering has shaved off some one percentage point from aggregate demand in the beginning of the year. In fact, the economy has been strong enough to make investors think about a Fed exit more seriously. Non-farm payrolls have increased by a little more than 200,000 per month for the past half year and unemployment is gradually coming down. Construction activity seems to be in a self-sustained improvement and, more importantly, home prices are moving higher. That’s very positive we think since it affects wealth positively and means that fewer households suffer from negative home equity. 3|
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Reading the Markets Sweden
Banks’ balance sheets are in a better condition than in Europe and credit growth is picking up. Inflation is low (falling) but as long as inflation expectations remain stable close to target that’s not negative but a good thing. There is a big ‘but’ though - another round of automatic fiscal cut-backs sets in this autumn. If once again consumers and businesses prove to be able to resist that headwind, then we think the Fed is prepared to pull the exit trigger. Maybe this will start by reducing the pace of purchases of MBS’s and by reinvesting proceeds from redemptions in shorter maturities (to improve flexibility in the Fed’s balance sheet) rather than in longer-terms papers. The result: curve steepening is a main guess we would say, but there are limiting factors: 1) The Fed is not likely to raise rates anytime soon even after a QE exit has been started, and that limits the potential for steepening via higher long rates. Historically, the 2/10 year curve has not been able to get any steeper than say 275bp and it may not even get there under current circumstances. 2) How will other asset classes react? Extremely low government yields have forced investors to chase yield by taking more risk in terms of equities and credit. It seems likely that a fair part of such positions could be reversed when (or before) the Fed pulls the trigger. The US 2/10 year curve
Source: Macrobond
Europe: Lousy at best, recession for six consecutive quarters (!), unemployment at record high and rising. Banks in the south under water and stagnating credit growth. Not much sign of light in the tunnel here. However, there is a ‘but’ here too. First, this may be more my personal thoughts rather than a Danske Bank house view. Austerity economics is getting increasingly questioned. The idea of expansionary fiscal contraction does not seem to work. The EU commission grants an extended period for budget alignment for Spain, Italy and the Netherlands. The new Italian government has taken back some of the tax hikes introduced by the Monti government. Maybe we are witnessing some sort of shift in balance, where governments are allowed to try certain strategic (or structurally motivated) tax reliefs as an attempt to put an end to recession and ever-increasing unemployment. How would the ECB respond to that? Well, if well designed we don’t think the ECB would object. Would this be a case for steeper curves in Europe too? Maybe, but in this case we see much more potent restrictions than in the US. If you need binoculars to identify Fed tightening, you probably need a telescope to see an ECB one. In addition, if the ECB goes for negative deposit rates, as some believe, that would no doubt be a potent cap on European rates along the curve.
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Reading the Markets Sweden
Sweden: As the GDP data showed, exporters have a tough time and investments fall sharply. But consumers do OK and so do services producers. Unemployment is high but to a considerable extent due to students trying to find jobs for nights and weekends. Consumer income growth is pretty robust. The US recovery is a positive thing but other than that we would hope too much out of Euroland. But one thing seems increasingly evident. There will be more fiscal stimulus – lower taxes, support for retired people and above all, efforts to promote jobs for young people, maybe even infrastructure projects. The government is under heavy fire for not doing enough to stem unemployment for young people and there is an election next year. This is the reason why we have mixed feelings about the (cyclical) need for lower rates. But that issue is maybe more a matter of the Riksbank being afraid of losing credibility about inflation targeting. In a somewhat longer term scenario along these lines, higher US rates probably have more potential to affect Swedish rates compared with European (German) rates especially since the Riksbank, unlike the major central banks, does not take part in any form of QE to keep longer-term rates low. Given that the right thing to do would be positioned for Swedish underperformance (versus Bunds). These are a few philosophical thoughts in a little longer perspective. Here and now can be different given the fact that the 2/10 year curve has steepened 30-35 basis point in just about a month.
Swedish long-end rates – now and tomorrow The introduction of a new discount curve marks a significant change which could potentially have a large effect on the Swedish fixed income market over time. In our Outlook 2013 We come in search of yield, from January, we discussed the risk premium (term premium) and how it has developed in Sweden over the last 10 to 15 years. Our study indicated that the risk premium has declined in two steps and that today it is close to zero or, maybe even more likely, negative. The first step occurred, we argue, when the Traffic light system for L&P companies was introduced in 2006. The new regulation set the start of a full scale market valuation of the sector’s liabilities. Hence, this provoked a new demand for long- dated bonds and swaps in order to protect the balance sheets. Insurance, life and pension companies became, at least in relative terms, a much more active market participant – especially in long dated fixed income products. When the new regulatory framework caused this sector to increase bond buying and swap receiving with the intention to DECREASE the risk in the balance sheet, the companies did this without requiring a certain risk premium, at least not to the same extent as other investors who normally require some incentives (i.e. enhanced expected return) in order to buy the longer bonds/receive swaps. The effect being that the risk premium declined in the Swedish yield curve, but probably was still slightly positive. The difference between implied forward repo rates and the Prospera surveys, which collect the interest markets participants expectations about the future repo rate, indicates that the next step in the process of the decline in the risk premium took place in mid2011. Amid the intensified euro crisis global investors fled to stable AAA-rated bond market in order to protect capital, rather than in order to enhance expected return. So the size of the risk premium was irrelevant in this case as well. The difference between pricing and survey data since mid 2011 gives an indication that the risk (term-) premium is negative in the Swedish yield curve. Last summer foreigners interest for Swedish bonds, at least to some extent, changed character. Amid lower global real rates (sent lower by central banks measures) focus altered from capital conservation to hunt for yield. This has, of course, also had repercussions for Swedish rates as well. Thus, foreigners’ view on Swedish bonds is now 5|
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Reading the Markets Sweden
a matter of safe asset as an alternative to for instance German bonds, offering a yield pick-up. Hence, despite a likely decline in demand for Swedish long end bonds from the domestic L&P sector, we believe foreign investors will continue to be more active in Swedish rates going forward since they offer a yield pick-up relative to peers with AAA-rating. At the end of last year, and at the beginning of this year, we raised a warning for a temporary decline in demand from foreign investors for SEK denominated bonds when the debt office announced an increase in issuance in EUR and USD bonds in 2013 (lending to the Riksbank). So far this year, the Debt office has issued close to half of what has been said will be done in foreign currency bonds in 2013. This has, we argue , weighed on the demand for Swedish bonds. How is demand for Swedish government bonds today? Statistic Sweden’s data on portfolio investments shows foreigners’ investments in Swedish government bonds and offers some interesting readings. Foreigners bought (net) Swedish (SEK) bonds for some SEK37bn in March after a couple of months of poor demand. However, worth noting is taking the supply in EUR and USD bonds into account it reveals a big aggregated demand from investors abroad. Although SEK bonds are not fully substitutions for the ones issued in EUR and USD, we believe that when these auctions abate demand for SEK government bonds will pick-up. Foreigners monthly net buying of SGBs
Source: Macrobond
The chart below shows: 1) Portfolio investments SGBs in total, 2) Portfolio investments in non-SEK and SEK bonds. Hence, during Q1 the demand for Swedish government bonds was record high when aggregating all currencies. If the interest persists when issuance in foreign currencies abates the SGBs will be in demand.
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Reading the Markets Sweden
Portfolio investments in SGB (total)
Source: Macrobond
Portfolio investments in SGB in foreign currency (blue line) and in SEK (red line)
Source: Macrobond
An evident risk near term to hold SGBs in spread to German bunds (10y) is if ECB moves towards negative deposit rates at the meeting next week. The chance for negative deposit rates has probably been priced out almost completely given the surge in bond yields over the last couple of weeks and thus just a small hint from Mario Draghi next week could potentially move the market a lot. Then we think it might be a bit adventurous to keep a spread tightening over the ECB meeting, we will probably at least decrease the risk allocated to this position. We keep our 2s10s curve flatteners, both “outright” and relative to a FRA curve steepener established a couple of weeks ago. After the last days higher short end rates the market now assigns a significant diminished likelihood for a rate cut at the July meeting. A few days ago, the market expected some 16bp cur whereas now it is only 8bp. Hence, we think it is a good opportunity to sell (receive) RIBASEP13 contracts as a protection for our curve flatteners. Short term, we believe there is room for lower long end rates after the recent surge. PMI data, payrolls and ECB meeting next week will probably, however, be decisive for rates in the near term. Long term, we believe the new discount rate curve in Sweden will eventually lead to a comeback of the risk (term) premium in the Swedish yield curve. The question is, though, if this will happen before the central banks start to near the exit and global long real rates start to climb “for certain”.
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Reading the Markets Sweden
Open strategies * P/L for strategies over year end reseted at 0 at the begninning of the year Type Money market
Curve
Curve
Box
Spread
Curve spread
Fwd ASW spread
Spread
Trade Sell (Rec) RIBASEP13
Idea Protection to our curve flatteners
Target & P/L Opened Start Target/Stop Now P/L Opened Buy SGB1057 vs. SGB1049 We see room for curve flattening Start Target/Stop Now P/L Opened Buy SHYP1580 vs. SHYP1576 We see room for curve flattening Start Target/Stop Now P/L Opened Buy SGB1057 vs. SGB1049 and The money market curve has remain flat Start steepen FRASEP13SEP15 whereas the bond curve has steepened Target/Stop Now P/L Sell BundJUN13 Buy 10YJUN13 After the Riksbank we see room for spreads Opened Start to tighten Target/Stop Now P/L Opened Buy SGB1054 vs. sell SGB1053 Demand for ultra long bonds should Start decrease due to softer rules for L&Ps. Target/Stop Now P/L Opened Buy SWH186 vs. SWH183, pay We extend the fwd ASW spread in covered Start matching swap bond curve space Target/Stop Now P/L Opened Buy longer mortgages vs. govies as supply Buy SWH185 vs SGB1051 Start worries much lower Target/Stop Now P/L
23 maj 2013 0.9 0.81/0.97 0.9 -3.5 22 maj 2013 99 80/110 99.5 -0.5 22 maj 2013 61.5 50/70 65 -3.5 08 maj 2013 48.5 32/58 42.5 6.0 17 apr 2013 55.5 40/63 63.6 -8.1 26 feb 2013 83.5 97/70 93 9.5 13 nov 2012 67.7 45/70 48.5 19.2 15 mar 2012 80.5 60/90 60 20.5
Status Hold
Source: Danske Bank Markets
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Hold
Hold
Hold
Hold
Hold
Hold
Hold
Reading the Markets Sweden
Weekly Data Calendar Monday, 3 June, 2013 00:00 EUR 03:50 USA 08:30 SEK 09:00 NOK 09:45 ITA 09:55 GER 10:00 EUR 10:30 UK 13:20 USA 14:58 USA 16:00 USA 16:00 USA 16:00 USA 23:00 USA Tuesday, 4 June, 2013 03:30 JPN 06:30 AUS 09:30 SEK 10:30 UK 11:00 EUR 11:15 EUR 14:30 USA 19:30 USA
EU-Russia summit Fed's Yellen (voter, dove) speaks PMI PMI PMI manufacturing PMI manufacturing, final PMI manufacturing, final PMI manufacturing Fed's Willams (non-voter, dove) speaks Markit manufacturing PMI, final Construction spending ISM manufacturing ISM prices paid Total Vehicle Sales Labor cash earnings Reserve Bank of Australia (cash rate target decision) Service production PMI construction PPI ECB announces allotment in 7-day (MRO) Trade balance Fed's George (voter, hawk) speaks
Wednesday, 5 June, 2013 02:00 USA Fed's Fisher (non-voter, hawk) speaks 08:30 SEK PMI services 09:45 ITA PMI services 09:55 GER PMI services, final 10:00 EUR PMI services, final 10:00 EUR PMI composite, final 10:30 UK PMI services 11:00 EUR ECB announces allotment in 7-day (USA) 11:00 EUR GDP, preliminary 11:00 EUR Retail sales 13:00 USA MBA Mortgage Applications 14:15 USA ADP employment 14:30 USA Unit labour cost, final 16:00 USA Factory Orders 16:00 USA ISM (NAPM) non-manufacturing 20:00 USA Beige Book
Index Index Index Index Index Index
USD bn Index Index m y/y % m/m|y/y Index m/m|y/y USA bn
Period
Danske Bank
May May May May May May
50.5
May Apr May May May Period Apr
Konsensus
49.6 48.9 45.5 49.0 47.8 49.8
49.0 47.8
Danske Bank
0.8% 50.5 50.0 15.10 Konsensus 2.75%
Apr May Apr
Previous
n.a.|1.0%
Apr
-1.7% 50.7 50.0 14.88 Previous -0.9% 2.75% -0.9%|0.5% 49.4 -0.2%|0.7%
-41.0
-38.8
Konsensus
Previous
49.8 47.5
48.6 47.0 49.8 47.5 47.7 52.9
Period
Danske Bank
Index Index Index Index Index Index
May May May May May May
49.0
q/q|y/y m/m|y/y
1st quarter Apr
-0.2%|-1.0%
-0.2%|-1.0% -0.1%|-2.4%
1000 q/q m/m Index
May 1st quarter Apr May
170 0.5% 1.0% 53.5
119 0.5% -4.0% 53.1
Konsensus
Previous 10.6% 2.2%|-0.4% 0.50% 375 0.50% 0.00%
Thursday, 6 June, 2013 07:30 FRA 12:00 GER 13:00 UK 13:00 UK 13:45 EUR 13:45 EUR 14:00 USA 14:30 USA
Unemployment Factory orders BoE rate announcement BoE announces asset purchase target ECB announces refi rate ECB announces deposit rate Fed's Plosser (non-voter, hawk) speaks Initial jobless claims
Friday, 7 June, 2013 07:00 JPN 08:00 GER 09:30 EUR 10:30 UK 12:00 GER 12:00 EUR 14:30 USA 14:30 USA 14:30 USA 14:30 USA 14:30 USA 21:00 USA
Leading economic index, preliminary Index Trade balance EUR bn Germany's Schaeuble & France's Moscovici discuss German-French ties Trade balance UK bn Industrial production mm/|y/y ECB announces 3-year LTRO repayment Nonfarm payroll 1000 Private payroll 1000 Manufacturing payroll 1000 Unemployment rate % Average hourly earnings, non-farm m/m|y/y Consumer Credit USD Bn
% m/m|y/y % GBP bn % %
Period 1st quarter Apr
Danske Bank
-0.8%|n.a. 0.50% 0.50% 0.00%
0.50% 0.00%
Danske Bank
Konsensus
1000 Period Apr Apr Apr Apr May May May May May
Previous 97.9 18.8
0.4%|n.a.
-3130 1.2%|-2.5%
165 175 0 7.5% 0.2%|… 14.0
165 176 0 7.5% 0.2%|1.9% 7.96
Source: Danske Bank Markets
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Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’). Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst’s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank upon request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts’ rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of highquality research based on research objectivity and independence. These procedures are documented in Danske Bank’s research policies. Employees within Danske Bank’s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank’s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors upon request. Risk warning Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis of relevant assumptions, are stated throughout the text. Date of first publication See the front page of this research report for the date of first publication.
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