Bond market jitters; SNB cracks open the champagne - Capital Economics
Nordic & Swiss Economics

Bond market jitters; SNB cracks open the champagne

Nordic & Swiss Economics Weekly
Written by David Oxley
We suspect that Swedish and Swiss government bond yields will come down again before long given the strong relationship with Bunds and the prospect of the ECB stepping in. However, our hawkish view that the Norges Bank will start to hike rates in Q3 justifies higher bond yields there, particularly at the short end of the curve. Next week, the release of Swiss CPI data for February is set to show that the core rate edged into positive territory for the first time in 12 months, while the manufacturing PMIs for February are likely to point to rising price pressures from supply problems.

Not immune to the bond market rout

As elsewhere, the sell-off in the bond market hit the headlines in Switzerland and the Nordics this week. In keeping with the trend over the past year or so, the Norwegian 10-year yield has tracked that in the US higher, while Swiss and Swedish yields have risen in line with those in Germany. (See Chart 1.)

Chart 1: 10-Year Government Bond Yields (%)

Source: Refinitiv

The moves illustrate the extent to which bond yields get dragged around by global conditions. In general, we think that yields in developed markets will remain low given that monetary policy will remain very accommodative. Moreover, the ECB is likely to step in to cap yields, if it hasn’t done so already. (See here.) The exception is Norway where our hawkish view that the Norges Bank will start to hike rates in Q3 (see here) justifies higher bond yields, particularly at the short end of the curve.

SNB breathes a sigh of relief

The 0.3% q/q increase in Swiss GDP in Q4 (data released this morning) was a bit better than expected and confirms that the country experienced one of the smallest declines in output in Europe last year.

Encouragingly, the KOF Economic Barometer (also released this morning) suggests that activity has been resilient to the latest lockdown. Interpreting moves in the series is tricky given that no breakdown is released. However, the Institute noted that the rise in February partly reflected stronger signals from the services manufacturing sectors. The Swiss economy remains well placed and output is set to regain its pre-virus level in H2, sooner than in the euro-zone.

Of course, this does not change the picture for the SNB, whose policy stance is as closely linked as ever to the ECB’s. That said, the fall in the franc against the euro this week will have given policymakers something to cheer. As we argued here, the drop was a symptom of the broader reflation trade and rotation in global equities. Indeed, in an echo of “Vaccine Monday” in November last year, the weakening of the franc coincided with a period of value stock outperformance. (See Chart 2.)

Chart 2: Swiss Francs per Euro & MSCI World Ratio

Sources: Refinitiv, Capital Economics

Inventories dragged GDP lower in Sweden in Q4

Data released this morning showed that the preliminary estimate of 0.5% q/q GDP growth in Sweden in Q3 was revised to a modest contraction (-0.2%). Net trade provided a chunky positive contribution although this was offset in part by drop in household consumption, which was not unexpected given the imposition of a de facto lockdown in November. However, the economy would still have grown had it not been for a sizeable rundown in inventories, which detracted 0.7%-pts.

The recent further tightening of restrictions to fend off a third wave of virus cases will be a new headwind in Q1. But it was encouraging that retail spending came roaring out of the blocks in January.

The Week Ahead

The release of Swiss CPI for February on Wednesday is set to show that the core rate edged into positive territory for the first time in 12 months. Meanwhile, the manufacturing PMIs for February are likely to point to riding price pressures from supply problems.


Data Previews

Swiss Consumer Prices (Feb.) Wed. 3rd Mar.

Forecasts

Time (GMT)

Previous

Median

Capital Economics

CPI m/m(y/y)

07.30

+0.1%(-0.5%)

+0.4%(-0.3%)

+0.6%(-0.1%)

Core CPI m/m(y/y)

07.30

-0.4%(0.0%)

(+0.0%)

+0.4%(+0.1%)

Edging higher

Energy and exchange rate effects probably provided Swiss headline inflation with a significant boost in February.

The headline rate rose in January, from
-0.8% in December to -0.5%, largely due to rise in the core rate (which excludes fresh and seasonal products and energy), from -0.4% to zero. Energy inflation also rose.

We suspect that the downward pressure on inflation from imported prices eased again in February, thereby boosting the core rate. Food inflation is also likely to have risen, while the increase in oil prices last month is likely to have contributed to a chunky rise in energy inflation, from -5.9% in January to above zero. All told, we have pencilled in a further increase in the headline rate, albeit to the heady heights of -0.1%.

Looking ahead, the Input Prices component of the manufacturing PMI points to headline inflation rising above zero in the coming months. (See Chart 3.) If sustained, the recent drop in the franc will also boost imported prices. However, underlying price pressures are likely to remain much weaker.

Chart 3: Man PMI – Input Prices & Headline Rate

Sources: Refinitiv, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time CET

Time (GMT)

Previous*

Median*

CE Forecasts*

Mon 1st

Nor

Retail Sales Ex. Motor Vehicles (Jan)

08.00

(07.00)

-5.7%(+8.6%)

Swe

Manufacturing PMI (Feb)

08.30

(07.30)

62.4

62.5

Swi

Retail Sales (Jan)

08.30

(07.30)

+2.6%(+4.7%)

Swi

Manufacturing PMI (Feb)

09.30

(08.30)

59.4

60.1

60.0

Nor

Manufacturing PMI (Feb)

10.00

(09.00)

51.8

52.0

Den

Manufacturing PMI (Feb)

11.00

(10.00)

42.1

43.0

Tue 2nd

Den

Change in Currency Reserves (Feb, DKK)

17.00

(16.00)

-12.0bn

Wed 3rd

Swe

Services PMI (Feb)

08.30

(07.30)

59.3

58.0

Swi

CPI (Feb)

08.30

(07.30)

+0.1%(-0.5%)

+0.4%(-0.3%)

+0.6%(-0.1%)

Swi

Core CPI (Feb)

08.30

(07.30)

-0.4%(+0.0%)

(+0.0%)

+0.4%(+0.1%)

Thu 4th

Swe

Unemployment Rate (Feb)

09.30

(08.30)

9.3%

Fri 5th

No Significant Data Released

Selected future data releases and events

Sun 7th

Swi

Referendums

Mon 8th

Swi

Unemployment Rate (Feb, sa)

08.30

(07.30)

3.9%

Den

Industrial Production (Jan)

08.00

(07.00)

+2.2%(+2.4%)

Nor

Industrial Production (Jan)

08.00

(07.00)

+3.4%(+2.7%)

Tue 9th

Nor

GDP (Jan)

10.00

(09.00)

+1.4%(-0.1%)

Nor

Mainland GDP (Jan)

10.00

(09.00)

+1.0%(-3.1%)

Swe

Private Sector Production

10.00

(09.00)

-0.5%(1.5%)

Wed 10th

Den

CPI (Feb)

08.00

(07.00)

+0.2%(+0.4%)

*m/m(y/y) unless otherwise stated. p=provisional.

Sources: Bloomberg, Capital Economics

Main Economic Forecasts

Share of

World GDP

GDP

Consumer Prices*

2019

2020

2021

2022

2019

2020

2021

2022

Switzerland

0.46

0.9

-3.0

2.7

2.8

0.4

-0.7

0.5

0.3

Sweden

0.42

1.3

-3.0

2.0

3.0

1.7

0.5

1.2

1.4

Norway

0.26

2.4

-3.5

3.5

3.3

2.2

3.0

2.0

2.0

Denmark

0.26

2.3

-3.8

3.3

3.3

0.7

0.3

0.8

0.8

Sources: Refinitiv, Capital Economics. *CPI for Switzerland, CPIF for Sweden, CPI-ATE for Norway, HICP for Denmark.

Key Market Forecasts

Forecasts

Forecasts

Latest

End 2021

End 2022

Latest

End 2021

End 2022

Swiss policy rate

-0.75

-0.75

-0.75

Swiss fr/euro

1.10

1.10

1.12

Swe. repo rate

0.00

0.00

0.00

Swed. Kr/euro

10.11

9.75

9.50

Nor. depo rate

0.00

0.50

1.00

Nor. Kr/euro

10.35

9.50

9.50

Den. depo rate

-0.60

-0.75

-0.75

Dan. Kr/euro

7.44

7.46

7.46

ECB depo rate

-0.50

-0.50

-0.50

US$/euro

1.21

1.25

1.25

Sources: Refinitiv, Capital Economics


David Oxley, Senior Europe Economist, david.oxley@capitaleconomics.com