Riksbank rate decision today is a close call, we expect a hold

In focus for the rest of the week

Today, the main event in the Nordics is the Riksbank monetary policy decision, due at 09.30 CET. Money market pricing implies c. 80% probability of a cut but we think it is more or less a 50/50 call, and we expect the Riksbank to leave rates unchanged and signal a cut for June. Although domestic inflation has surprised to the downside recently, the risks highlighted at the March meeting (global central banks, geopolitics and the SEK) have all developed worse than expected and the Riksbank has far less to lose by opting for a cautionary stance. Between now and June we will have two more domestic inflation prints and updates from both the Fed and ECB. 

Also, the National Debt Office will announce April's central government payments. This is interesting due to the SEK32bn smaller accumulated deficit than predicted in March.

In Germany, we receive industrial production data for March. The German economy grew 0.1% q/q in the first quarter of the year, and it will be interesting to see if improvements in industrial activity helped the better-than-expected growth rate.

Overnight, China will release trade data. Export orders in PMI have been quite strong lately pointing to export recovery. The monthly data are very noise, though, so hard to predict on a monthly basis. Focus also on imports as indicator for Chinese manufacturing and construction activity.

Tomorrow, we expect the Bank of England (BoE) to keep the Bank Rate unchanged at 5.25%, which is in line with consensus and current market pricing. Overall, we expect the MPC to cautiously soften its communication priming markets for a rate cut, delivering the first cut of 25bp in June.

On Friday, we will scrutinize the minutes from the April ECB meeting at 13:30 CET for any hints of the future direction of monetary policy. However, recently the minutes have not had any significant new information and subsequent market impact.

Also on Friday, the Fed will pay close attention to the University of Michigan's preliminary consumer sentiment survey for May. The April edition showed a concerning uptick in inflation expectations, but lower gasoline prices could have eased inflation concerns ever since.

The week ends with China's release of CPI and PPI overnight on Saturday for April. CPI inflation was just 0.1% y/y and China is still flirting with negative rates reflecting too weak domestic demand. PPI inflation should show some increase following the latest sharp rise in metal prices. 

Economic and market news

What happened overnight

No news on a peace deal in the Middle East, as yesterday Israel expanded operations in Rafah, taking "operational control" of the main Egypt/Gaza ground crossing on the Palestinian side. Hamas said they have accepted an agreement which would have brought a ceasefire in exchange for the release of Israeli hostages, whereas Israel has stated it falls short of their requirements but have sent a delegation to negotiate. Negotiations are set to continue during the day.

BoJ Governor Ueda addressed the links between yen weakness and the potential need for tightening monetary policy. He noted that the recent volatility and weakness in the JPY could significantly drive prices upward, stating there "is a chance we may need to respond with monetary policy". The yen continued its decline overnight with USJPY having breached the 155 mark again as of this morning.

What happened yesterday

Yesterday was quiet in terms of economic news. Euro area retail sales grew 0.8% m/m in March but was still at a muted level, which indicated consumers remain cautious despite solid household financial fundamentals from high employment and rising real income.

Market movements

Equities: Global equities rose yesterday, primarily driven by Europe, and financials helped by a surprisingly strong reporting from UBS. The sector rotation differed significantly on either side of the Atlantic, but we observed the unusual phenomenon of both consumer cyclicals and tech declining while the rest of the sectors climbed, with volatility decreasing. It is noteworthy how swiftly the VIX has returned to the 13-level. Investors exhibit considerable faith in the current macro environment, which, in our opinion, is entirely reasonable. In the US yesterday, Dow +0.1%, S&P 500 +0.1%, Nasdaq -0.1% and Russell 2000 +0.2%. Asian markets are trending downwards this morning, despite the yen weakness. US and European futures are slightly lower.

FI: Rates continued sliding lower through yesterday's session, which was characterized by very little market-relevant news. The action was mainly in long-end rates with Gilts emerging as the standout performer across regions, while the declines in US and EU rates were comparably more modest. 10Y Bunds dropped 5bp to 2.41% and is now trading just marginally above our 12M forecast of 2.35%. Long-term EUR inflation swap rates (e.g. 5y5y) continued moving lower in tandem with energy prices. Implied rates volatility, as measured by the MOVE index, fell to a 1-month low, which seems fair following Fed Chair Powel'’s decision last week to rule out further hikes (and curb the outcome space).

FX: Today, all eyes will be on the highly anticipated Riksbank meeting and by extension the SEK. In our non-consensus call, we expect an unchanged decision and the Riksbank to open the door for a cut in June. In our base case, we expect this to lend support the SEK given the ca. 80% probability priced for a cut, though the scope of appreciation potential depends on forward guidance. EUR/GBP edged higher during yesterda'’s session as markets anticipate the Bank of England meeting on Thursday, trading narrowly below the 0.86 mark.