Ok, so for the sake of brevity, let’s just pretend like there’s not a political crisis going on in Sweden right now.
Thinking instead about the Riksbank and its rather precarious position vis-a-vis the ECB and the whole DM policy normalization push, this data (out earlier this morning) is pretty interesting:
- Sweden Prel. 2Q GDP Grew Quarterly 1.7% vs Est. Growth 0.9%
- Swedish preliminary 2Q GDP grew annual 4.0% vs est. growth 2.7%, according to statement from Statistics Sweden.
- Sweden June Retail Sales Rise 3.5% Y/y; Est. Increase 2.9%
- Sweden June retail sales rise 0.2% m/m vs est. of 0.2% increase, Statistics Sweden says in statement.
Not to put too fine a point on it, but those look like blockbuster numbers to me and the problem is, that puts the Riksbank in a position where they are going to have to get more aggressive on policy normalization.
As a reminder, Sweden’s monetary policy is tethered to ECB policy (just think about what it means for the krona when the elephant that is Mario Draghi decides to make a move that impacts the euro). That’s meant the Riksbank has had to follow the ECB down the easing rabbit hole (in order to avoid the kind of krona strength that would undercut their inflation target) and it now means they have to follow the ECB out of that rabbit hole.
Of course along the way, they got a housing bubble for the trouble, which raises very real questions about what happens to that bubble when the Riksbank turns hawkish. You can read much more on that in this post:
You’ll recall that Sweden removed their easing bias early this month. Simultaneously (i.e. to offset things), they warned on currency strength.
Well, a couple of weeks later they got a hot inflation print, which sent the krona surging against the euro. Two days after that, we got the Riksbank minutes, which promptly caused the krona to plunge when everyone read these two comments:
- Riksbank says in minutes from July 3 meeting that while Swedish economic activity is strong and inflation has become somewhat higher than expected in recent months, “several board members emphasized that it was not sufficient for inflation to temporarily touch the 2% mark.”
- Says that “after a long period of below-target inflation, it is now particularly important that inflation is sustained close to 2%”
Ok, so that was the backdrop for the GDP and retail sales figures shown above.
Needless to say, they triggered an immediate krona rally:
And here’s a fun annotated chart that illustrates everything noted above:
“Those Sweden GDP and retail sales figures were very punchy, blowing away economists’ estimates and sending the SEK soaring. And therein lies the rub — the Riksbank voiced concern about the krona appreciating too quickly, and today’s 0.85% jump in the trade-weighted SEK will not be viewed favorably by policymakers,” Bloomberg notes.
What say you Danske Bank senior analyst Kristoffer Lomholt?…
— Kristoffer Lomholt (@lomholt10) July 28, 2017
Yes, “monster strong.”
“Riksbank must accept a stronger SEK than today,” SEB Chief Economist Robert Bergqvist said, adding that the krona reaction is entirely “reasonable.”
Now let’s see how “reasonable” the Riksbank turns out to be in the face of data that overwhelmingly suggests they need to normalize.