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Dear Sweden: ‘Slightly Hawkish’ Doesn’t Work Right Now

Remember, "hawkish" is a highly relative term - especially in light of recent events.

Admittedly, I was hesitant to comment on today’s Riksbank meeting because nearly everyone seems to think it’s a non-event. But I’m not so sure.

One of the biggest advantages to not caring what other people think (and I most assuredly do not) is that it frees me up to go with my gut and throw things out there, even if I might be wholly off base. I’m not exactly a household name, so if I’m wrong, nobody besides my cult following will remember (and those folks will forgive me – that’s what cults do). But if I’m right, I can always link back to previous posts and say “see, I warned you about this.” It’s a win-win.

In any case, the Riksbank hiked for the first time in seven years last month. Maybe you remember. The first red box on the chart below denotes what Paul Krugman once branded a horrific policy mistake, the green box is the subsequent reversal/aggressive push into accommodation and the tiny red box over there on the right-hand side is the December hike.

RiksbankHR

(Bloomberg)

Last month’s move was generally described as a “dovish hike”. Basically, they were hiking because they know the window is closing and by most accounts, the rate path was more dovish than expected.

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At the time (i.e., in December), we noted that Sweden still has to worry about “the evolution of the broader macro picture which is now clouded by myriad uncertainties not the least of which are trade and Brexit”.

Fast forward to Wednesday and the Riksbank was of course on hold, which was expected, but the rate path was unchanged, meaning a September hike is still possible and suggesting ~50bp of hikes each year until early 2022. Additionally, the bank ditched the mandate that had allowed Ingves to intervene in the FX market (that mandate would have needed to be extended after expiring yesterday).

Needless to say, the krona (the worst-performing major currency of 2019) surged on the news, extending gains after Ingves said it should strengthen given the economy.

EURSEK

“The market has reacted positively to a reasonably upbeat statement, which looks for 2 hikes this year and is upbeat on growth”, SocGen’s Kit Juckes wrote Wednesday morning, adding that the decision not to extend the FX intervention mandate “surely isn’t a surprise to anyone given the recent SEK softness.”

Duly noted, but this comes amid a backdrop where the Fed has shifted dovish, the RBA has pivoted neutral (from hawkish) and the ECB looks to be on the verge of having to postpone the first rate hike and announce a new round of TLTROs in the interest of shoring up the bloc’s economy amid a recession in Italy and the makings of a downturn in Germany. Swedish monetary policy is to a certain extent beholden to what goes on at the ECB and one wonders whether sticking to the current rate path and adopting even a slightly “hawkish” bent (and “hawkish” is everywhere and always a relative term in the post-crisis world) is tenable and/or advisable at this juncture.

Indeed, SEB called the decision not to extend the currency intervention mandate “a bit surprising”, even as Carl Hammer called it “sensible” on Twitter.

Here’s Swedbank’s take (earlier, the bank’s Knut Hallberg remarked that policymakers “seem to be feeling quite certain” about their plans):

The Board didn’t extend the FX mandate, which is a hawkish signal causing the SEK to strengthen. Information about reinvestments on maturing 2020 bonds will be announced in April. Small downwards forecast revisions were made to Swedish GDP and the Kix forecast was revised up due to spot development. CPIF, in the short term, was revised up due to higher energy prices and a weak SEK. The risk picture was overall balanced, but the bank still emphasized the debt level of the households in their PM thereby signaling a continued concern about the development. As expected the Board didn’t include the full impact of the Jan. agreement in their forecasts. The members’ cautiousness is expected to prevail and the path signals a hike in H2 2019 in line with our view.

SBRIKS

Handelsbanken noted the obvious on Wednesday, which is that the window for hikes will probably slam shut in 2019 considering the likelihood of a global economic slowdown. “Our call is hence that the repo rate will stay at zero throughout 2020”, the bank said.

For their part, Nordea calls the Riksbank’s outlook “still too optimistic”.

“The rate path implies only a small probability of a rate hike at the next meeting in April [and] our interpretation is that the Riksbank currently plans to hike rates in September this year at the earliest”, the bank writes on Wednesday, before delivering the following take which certainly comes across as “cautious”:

The Riksbank revised down its economic forecasts but is still too optimistic. For instance, the bank sees euro area GDP at 1.4% for 2019, which stands out compared to many other forecasters. Moreover, household consumption will increase by 1.7% in 2019, which is well above our call at 1.0%.

NordeaRB2

The Riksbank’s inflation forecast was almost unchanged and seems confident that inflation will remain at the 2% target. The bank’s forecast is in line with our view for H1 2019 while our forecast is substantially lower thereafter.

NordeaRB

Nordea goes on to describe today’s meeting as containing “no major surprises”, but from where I’m sitting, it’s somewhat surprising that they (the Riksbank) didn’t make an effort (even if in passing) to stick to the dovish script as established by Powell and Lowe.

Indeed, if you read the rest of Nordea’s note, they explicitly say that pretty much the only rationale for hiking going forward will end up being the necessity of following the ECB (underscoring what we noted above about Sweden’s monetary policy being tethered to Frankfurt). To wit, from Nordea:

The Riksbank will hardly see any domestic reasons for hiking the rate in the coming years, we think. The reason for why we nevertheless see a repo rate hike in December 2019 is that we judge that the Riksbank will shadow the ECB, which is expected to take an initial step at the end of the year. The risk is that it will take even longer than that for monetary policy to be tightened. For example, it is not certain that the Riksbank will follow the ECB. More important is that the economic weakening that has occurred both in the euro area and Sweden could very well lead to central banks having to bide their time.

That latter bit is key. At the risk of making mountains of molehills, one has to question the wisdom of the relative belligerence that came through in today’s decision. Invariably, someone reading this will scoff at the “belligerent” characterization, but again, this is a world where “hawkish” is a highly relative term. And while years of krona weakness reduces the risk inherent in one meeting’s worth of “slightly” hawkish leanings, in an environment where the likes of the Fed, the ECB and the RBA are inclined to dovishness, it would probably behoove Sweden to be especially cautious when it comes to being “overly optimistic” (as Nordea puts it).

Supporting our assessment is the following from BofAML’s Riksbank preview (out Tuesday) which we’re using a screengrab from because actually seeing it makes it more poignant than had we just used an excerpt:

Hands

Finally, there’s the following, which we’ll just present without further comment because it’s colorful enough on its own.


 

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