Sweden continues to show positive signs of growth, in both leading and coincident macro indicators. Building permits continue to rise, and we are seeing increasingly stronger indications of a tightening labour market. Resource utilization leads wage growth historically by 6 quarters ahead, and 20 years of history of this relationship quoted by the Riksbank is something I am not looking to discount too quickly. What's good about the RU indicator from the Riksbank is that it is not highly-revised economic indicator (it's described as a PCA of surveys as well as labour market data), and I think that it's clear that it suggests a trough in wage growth (obviously to be careful of axes and scale).
Although annual gross pay may not be as clean a metric for labour market driven cost pressures, vs just wage growth, the current uptrend in the former I think is worth paying attention to. A Bloomberg article from last week highlights that job vacancies are the highest since 2000 'with no less than 12 of 15 job sectors reporting a labour shortage' in Sweden.
The interesting dynamic at play with the SEK is the pull-tug relationship between the FX and inflation, and thus rates (which courtesy of Nordea, they brought up) where appreciation in the SEK, brings some imported disinflation, causes rates to rally and vice versa, presenting itself as the main argument against being bullish SEK or paid SEK rates.
I have some counterarguments to the view above:
1)Outright inflation still okay: The Nordea chart looks at individual surprises (which I assume is actual vs forecast) and maybe under-reps the fact that inflation outright, has been steadily grinding upwards from 2014 measured by core CPIF inflation at 2.3% latest, from its trough of 0. Although high outright inflation can be considered a late-cycle indicator, I don't think that's the case especially when CPIF has been at 2% only for about 2 months or since July this year, whereas in 07 for example, it stayed around 2% for about 2 more years before levelling off into a contractionary period.
2)FX input to monetary policy perhaps overstated: A Riksbank paper on FX pass-through to inflation shows that an average, a 10% depreciation of the SEK causes annual inflation to increase by 0.5% with a 6 month lag. Of course it may be a simplistic assumption, but if we apply it to the converse, the SEK has not appreciated to such an extent, and as such I think is not as large a headwind to Swedish growth and inflation, especially when the KIX has not overshot the Riksbanks' forecasts and we are at the upper-bound of recent trading ranges in the FX.
3) EUR stretched vs SEK: Given the fact that long EUR positioning at the moment is more extended than long SEK, I think there's value in being long SEK around 9.700-9.800 (EURSEK), especially with its current divergence with the front-end rates spread. If the SEK had rallied much further, then I think the argument about inflation being seriously threatened gets more credence. In addition to this, if you compare [%] change in the EURSEK FX rate compared to a global IP (or even the US ISM Manu PMI), you can see that in global cyclical upswings, the SEK tends to appreciate, and I lean against this as well from a top-down view to be long SEK. A look at the spread of overnight rates shows that its highly rare to see rates in Europe trade over Sweden. This is another asymmetry to lean on.
Vols are trading at historical lows and although EURSEK vols tend to uptick on risk-off periods, perhaps it might be worth looking at owning some puts (6m maybe? I'm far from an option pricer sadly at the moment). Being long FX also is less punitive than being paid SEK rates where for e.g. paying 1y1y is -40 bps of roll-down (I'm discounting proxies of expression fia fwd curves / flies that mimick a rates selloff in SEK). We'll see how it goes in 4-6m time but conservatively target 9.400-9.1000 as long as 9.800-9.900 is held.
Mostly a place where I write down my macro/RV ideas. Feedback more than welcome.