“Positive” Draghi to give Riksbank a headache?

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Lauri Hälikkä, Fixed Income strategist at SEB, expects further monetary expansion in Sweden following Mario Draghi’s speech yesterday.

Draghi noted yesterday that household demand has been strong (note retail sales 2.2% y/y in April), and loss in momentum is mostly due economies outside EU. With governing council being slightly cautious on economic outlook, the QE program is likely to be implemented fully as planned. The final US composite PMI reading shows continued recovery and non-manufacturing ISM (55.7), despite a decline from May, remains at healthy level as well. ADP employment figures also indicate sustained labour market recovery.

Bonds continued to decline yesterday after Draghi noted that higher volatility in the bond market is expected. German government yields increased by 16bps driven by real yields as inflation expectations have remained stable. The meeting between Greece representatives and Jean-Claude Juncker did not result in any concrete results. Discussions continue today and Tsipras assert that we should not worry about the IMF payment of EUR 300m due tomorrow.

According to the Beige book released yesterday, the economy continued to expand across most regions from early April to late May and the feeling is that the economy is shaking off its winter weakness. Moreover, Districts are generally optimistic about the future: the word “optimism” appears 19 times while “pessimism” only once and the “strong” iterations appeared more than 100 times compared to 76 back in April. Further, the tighter labor market seems to be pushing wages slightly higher across several districts and sectors. So after the very weak first quarter, we are optimistic with respect to real GDP growth in the current second quarter and beyond. As such, our forecast still is for Fed lift-off in September.

Iran is asking the other OPEC members to be ready to make room for 1 million barrels of extra oil within 6 months after the sanctions are lifted. At the same time Iraq is planning to increase its production by some half a million barrels in June while Saudi Arabia keeps its production close to all time high. The global oil market is already running a surplus with little room for more supply. Most OPEC members will not want to cut back production as they are already running a budget deficit along with the lower oil price.

It took some time for the Riksbank to wake up to the currency war that has been driven by relative monetary policies. Now the situation is different. SEK is clearly in the Riksbank’s focus and the direction of ECB monetary policy “governs” Swedish monetary policy. After yesterday’s ECB meeting the euro strengthened against all currencies except one, the krona. TCW index fell 1% yesterday (stronger krona) and is back around the levels when the Riksbank decided to cut between regular meetings in March. The somewhat ironic situation is thus that good European news with 1) increased market confidence on the ECB monetary policy is working and 2) rising risk appetite means that the likelihood of further monetary expansion in Sweden is increasing.

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