Investment Research
03 July 2013
Reading the Markets Sweden The Riksbank: this time, forecasts for growth inflation and the repo rate were all almost unchanged compared with the April report. One piece of news is that the Riksbank has raised its estimate on NAIRU on the back of a larger inflow of immigrants than previously expected. We see no reason to alter our trading recommendations for the time being.
Danske Bank Markets’ market view in a nutshell Segment
Tactical view (<3m)
Grade* Last update
Delta
Neutral
1
18/06-2013
Curve view
Neutral
1
18/06-2013
Cross country sprds Neutral
1
10/06-2013
Short-end (<2Y)
Steepen FRAJUN14/JUN15, more risk in front contract
2
18/06-2013
Index-linked bonds
Buy SGBi3107 in BEI spread
3
18/06-2013
Covered bonds
Neutral
3
12/06-2013
Swap Spreads
ASW box for relative flattening/outperformance of swaps/swap curve
Segment Delta Curve View Cross country sprds Repo rate
3
Strategic view (3-6m) Higher rates Neutral Neutral 3m 1.00%
2 1 1 6m 1.00%
27/06-2013
Last change 28/02-2013 18/04-2013 23/05-2013
12m 1.00%
* Grade of conviction 1-3. 3 = strongest.
Chief Analyst Michael Boström +46 8 568 805 87
[email protected] Quant/Strategy Carl Milton +46 8 568 805 98
[email protected]
Important certifications and disclosures are contained from page 6. www.danskeresearch.com
Reading the Markets Sweden
Steady as she goes This time (we almost would say for once) the Riksbank did not surprise the market. In fact, forecast revisions – international and Swedish growth, inflation and the repo rate path – were small-to-insignificant. The European situation will remain a headwind for years to come even though there are some signs of things moving in the right direction. Accordingly, the Swedish export industry will face rather modest demand for some time to come and this will restrict investment demand too, at least for now. Swedish consumers are expected to be the main source of strength. RB CPIF forecasts in July and April
Differences are very small
2.50
0.3 0.2
2.00
0.2 1.50
0.1 1.00
July April
0.50
0.1
0.0 -0.1
Source: The Riksbank
2016-09-01
2016-05-01
2016-01-01
2015-09-01
2015-05-01
2015-01-01
2014-09-01
2014-05-01
2014-01-01
2013-09-01
2013-05-01
2013-01-01
2012-09-01
2012-05-01
2012-01-01
0.00
1
3
5
7
9
11 13 15 17 19 21 23 25 27 29 31 33
-0.1 -0.2 -0.2
Source: The Riksbank
The Riksbank’s projection doesn’t really stand out as odd compared to standard forecasts but still places itself on the optimistic side of the range of estimates for the next couple of years. There is a piece of news in the monetary policy report that is worth mentioning. The Riksbank has raised the unemployment forecast for 2014 by 0.3 percentage points and by half a percentage point for 2015. Normally such changes reflect a more pessimistic view on the economic outlook but not this time. Instead, the reason is that the SCB has made a new projection for population growth. According to this, immigration is expected to be higher than previously thought. This raises the rate of growth of the working force but also the number of people unemployed, since a fairly large share of immigrants are expected to be in an unfavourable position to get a job. So, both actual and long-term sustainable unemployment – or NAIRU – will be higher.
Riksbank forecast 2013
2014
2015
GDP ca l corr
1.6 (1.4)
2.9 (2.9)
3.3 (3.2)
Empl oyment
0.7 (0.4)
0.7 (0.7)
1.2 (1.3)
Unempl oyment
8.2 (8.2)
8.1 (7.8)
7.3 (6.8)
CPI
0.1 (0.1)
1.3 (1.4)
2.6 (2.7)
CPIF
0.9 (1.0)
1.4 (1.4)
1.9 (2.0)
SEK (KIX)
103.2 (101.4) 102.3 (101.1) 101.1 (101.2)
Source: The Riksbank
In short, the Riksbank made a big (model-based) adjustment of the inflation and policy rate outlook in April simply because it no longer felt comfortable with the earlier inflation forecasts, which assumed a rather steep increase back to target. Now they are sort of ‘back on track’ and can return to the good old trade-off between inflation targeting and financial stability (read risks attached to consumer debt). The policy report clearly states that it is true that a lower repo rate would help to bring the inflation back to target somewhat sooner but that this would also mean higher risks for rising household debt, creating longer-term instability. So, the compromise is to keep rates low for a while (for about a year). Numerically, the result is a repo rate path that is almost identical to the one in April.
2|
03 July 2013
www.danskeresearch.com
Reading the Markets Sweden
Almost identical repo rate path as in April
The repo rate according to Stina
3 1.06
2.5
1.04 2
1.02 1.00
1.5 July
1
April
0.98 0.96 0.94
0.5
0.92
Source: The Riksbank
2016-08-01
2016-05-01
2016-02-01
2015-11-01
2015-08-01
2015-05-01
2015-02-01
2014-11-01
2014-08-01
2014-05-01
2014-02-01
2013-11-01
2013-08-01
0
0.90
Source: Danske Bank
Just as a curiosity one can observe that there are still some discrepancies between the Riksbank and market pricing. Further out, the market still prices in slower rate hikes than suggested by the Riksbank. Nearer term, it is the other way around. In the RB rate path there is still an easing bias (6bp) up to Q2 14. The market (Stina), however, sees an almost equal hiking bias (5bp) by Q2 next year – why? We find it hard to believe that the market forecasts a more rapid economic recovery and judging by the still very compressed break-even spreads, one can hardly claim that the markets are more bearish on inflation (3105 BEI trades 103bp and 3107 BEI at 113.5bp).
Market comment – no reason to alter our recommendations The Riksbank rate decision was to a large extent already priced in. Moreover, the previous division in the board appears to remain in place despite the new members. As not much new information emerged, we see little reason to alter our trading recommendations dramatically. We keep our position for wider BEI spreads (buy SGBi3107 vs SGB1051) in the short end of the curve as a key trade. A higher inflation rate in y/y terms during the autumn is likely to have a supportive effect on short-end BEI spreads. In the course of this month the position will yield a small positive carry. The position is relatively unchanged from where we initiated it. We regard current levels as a good entry point. On the ASW curve we continue to recommend buying SGB1049 vs longer-dated ASW spreads, especially SGB1057. Longer ASW levels are wide given the yield level (see chart below) and we think this has mostly been driven by flows. Over time we expect pricing to normalise. In such an environment we argue that SGB1049 ASW should be much more resilient. The loan trades dear in the repo market and short papers generally tend to be in short supply. We reiterate the recommendation.
3|
03 July 2013
www.danskeresearch.com
Reading the Markets Sweden
Long ASW spreads too wide given the rate level << SGB1057 2.4 2.3 2.2 2.1 2 1.9 1.8 1.7 1.6 1.5 aug-12
ASW SGB1057 >> -30
-35 -40 -45 -50 -55 -60 okt-12
dec-12
jan-13
mar-13
maj-13
jun-13
-65 aug-13
Source: Danske Bank Markets
The Riksbank had little impact on the FRA curve, as moves were generally dominated by EUR market volatility in the wake of the uncertainty regarding Portugal’s government. The FRA curve still appears somewhat flat compared with the RB’s own repo rate path. We previously recommended a steepener between FRA JUN14 and JUN15. There should be room to price in more cuts in this segment and at the same time the JUN14 leg trades somewhat high compared with the RB’s expectation (a full hike is priced in). To get a less directional position we have suggested taking a larger position risk-wise in the JUN14 leg. Since we took on the position, the FRA curve has steepened significantly. However, we have lost some pnl on the long delta position in the JUN14 leg. We keep the recommendation for the time being. The FRA curve has steepened significantly SEKFRAJun15 vs Jun14 55
50 45 40 35 30 25 20 2012-12-07 2013-01-26 2013-03-17 2013-05-06 2013-06-25 2013-08-14 Source: Danske Bank Markets
4|
03 July 2013
www.danskeresearch.com
Reading the Markets Sweden
Open strategies * P/L for strategies over year end reseted at 0 at the begninning of the year Type BEI spread
Trade Buy SGBi3107 sell SGB1051
Idea BEI 3107 trades at a too low rate
ASW box
Sell SGB1057, buy SGB1049 in The ASW box looks attractive an ASW box
Money market
Sell (rec) FRAJUN14 vs. FRAJUN14 yield has moved too much FRAJUN15 with more risk in the relative to longer FRA yields front
Target & P/L Opened Start Target/Stop Now P/L Opened Start Target/Stop Now P/L Opened Start Target/Stop Now P/L
18 jun 2013 112 145/90 112.5 0.5 12 jun 2013 -6 15/-15 -11.8 -5.8 05 jun 2013 38 52/28 49.5 -4.5
Status Hold
Hold
Hold
Calendar week of 8 July 2013 Monday, 8 July, 2013 07:00 JAP 08:00 GER 09:30 SWE 09:30 SWE 10:30 EMU 12:00 GER 15:00 EMU 21:00 US Tuesday, 9 July, 2013 09:00 EMU 10:30 UK 10:30 UK 13:00 US
Eco Watchers survey: current (outlook) Trade balance Industrial production Industrial orders Sentix Investor Confidence Industrial production Eurogroup meeting Consumer credit ECOFIN meeting Industrial production Trade balance NFIB small business optimism
Wednesday, 10 July, 2013 01:50 JAP Domestic CGPI 01:50 JAP Tertiary industry index 07:00 JAP Consumer confidence 08:00 GER HICP, final 08:45 FRA Industrial production 09:30 SWE Unemployment (PES) 10:00 ITA Industrial production 20:00 US Minutes from FOMC meeting Thursday, 11 July, 2013 JAP BoJ monetary policy announcement JAP BoJ announces 2014 monetary base target 01:50 JAP Machine orders 08:45 FRA HICP 09:30 SWE CPI 09:30 SWE CPIF 09:30 SWE Average house prices 10:00 EMU ECB monthly report 14:30 US Import prices 20:00 US Budget statement Friday, 12 July, 2013 00:00 JAP 06:30 JAP 10:00 ITA 11:00 EMU 14:30 US 14:30 US 15:55 US
Bank of Japan monthly report Industrial production, final HICP, endelig Industrial production PPI PPI core University of Michigan Confidencem, preliminary
Index EUR bn mm/|y/y mm/|y/y Net. bal. mm/|y/y USD bn.
Period Jun May May May Jul May May Period
Danske Bank
Konsensus
Previous 55.7 (56.2) 18.1 -0.5%|-0.8% -10.3%|1.7% -11.6 1.8%|1.0%
Danske Bank
12.500 Konsensus
11.058 Previous
mm/|y/y GBP Mill Index
May May Jun Period Jun May Jun Jun May Jun May
Danske Bank
m/m|y/y m/m Index m/m|y/y m/m|y/y % m/m|y/y
Period
Danske Bank
% JPY trn. m/m|y/y m/m|y/y m/m|y/y m/m|y/y SEK Mill m/m|y/y USD bn
May Jun Jun Jun Jun Jul Jun Jun
m/m|y/y y/y m/m|y/y m/m|y/y m/m|y/y Index
Period Jul May Jun May Jun Jun Jun
0.1%|-0.6% -2579 94.4 Konsensus
Previous 0.1%|0.6% 0.0% 45.7 0.1%|1.9% 2.2%|-0.5% 4.0 -0.3%|-4.6%
Konsensus
Previous
4.4
270 -8.8%|-1.1% 0.1%|0.9% 0.2%|-0.2% 0.2%|0.7% 2.104
-0.1%|-0.1% -0.1%|0.9%
-0.6%|-1.9%
Danske Bank
Konsensus
Previous
85.0
-2.0%|-1.0% 1.4% 0.4%|-0.6% 0.5%|1.7% 0.1%|1.7% 84.1
Source: Danske Bank Markets
5|
03 July 2013
www.danskeresearch.com
Reading the Markets Sweden
Disclosure This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’). The authors of this research report are Michael Boström, Chief Analyst and Carl Milton, Quant/Strategy analyst. 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 instrume nts 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. Dan ske 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 on 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 a sensitivity analysis of relevant assumptions, are stated throughout the text. Expected updates This publication is updated on a weekly basis. Date of first publication See the front page of this research report for the date of first publication.
General disclaimer This research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) (‘Relevant Financial Instruments’). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not
6|
03 July 2013
www.danskeresearch.com
Reading the Markets Sweden
undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in this research report. This research report is not intended for retail customers in the United Kingdom or the United States. This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank’s prior written consent.
Disclaimer related to distribution in the United States This research report is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to ‘U.S. institutional investors’ as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to ‘U.S. institutional investors’. Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA but satisfy the applicable requirements of a non-U.S. jurisdiction. Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in nonU.S. financial instruments may entail certain risks. Financial instruments of non-U.S. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission.
7|
03 July 2013
www.danskeresearch.com
