Riksbank Cuts Interest Rates by 25bp and Signals 2-3 More Rate Cuts in 2024

In focus today

In the US, minutes of the Fed’s July meeting will be published in the evening. While the focus will naturally be on any clues regarding future rate cuts, the views are likely at least somewhat outdated given that the July jobs report was published only after the meeting. Furthermore, the US Bureau of Labor Statistics will publish revisions to the nonfarm payrolls and there is a very wide estimate for the revisions.

Economic and market news

What happened yesterday

In Sweden, the Riksbank cut policy rate by 25 bp as anticipated by the market. The Riksbank message of “two to three” more rate cuts for 2024 was however a tad on the dovish side to our expectations. In the statement, the bar to change this outlook is also seemingly high as they seem confident that upside risks to inflation have “declined significantly”. We adjust our call by adding a 25bp rate cut in September, meaning that we expect 25bp cuts at the three remaining meetings for 2024. For 2025, we expect three cuts during the first half of the year, reaching an endpoint of 2.00% by summer (previously 2.00% by Q4-25).

In the US, Fed’s Bowman (voting member) spoke about monetary policy. She sounded rather hawkish, as she warned against overreacting to any single data points, while she remains cautious about making any shifts in rates, as she sees continued upside risks for inflation. By this statement Bowman clearly positions herself as one of the most hawkish voices in the FOMC now. Our expectation is still that we will see a 25bp rate cut at the September meeting.

In the euro area, the final HICP data from July reveals that domestic inflation, measured by the ECB’s ‘LIMI’ indicator, dropped slightly to 4.3% y/y in July from 4.4% in June. The persistently high inflation is crucial to the ECB’s policy decisions and has been consistently highlighted in recent monetary statements. With decent demand in services, low unemployment, and high wage growth, domestic inflation is expected to remain strong. Consequently, it is unlikely to dip to 2% over the next year, even as overall HICP may hit that mark later this quarter. Given its importance in ECB policy, we expect continued restrictive measures, with the next policy rate cut in December, bypassing the September meeting, followed by three cuts next year.

In Turkey, The Central Bank of Turkey left the policy rate unchanged at 50% as largely expected. Slowing domestic demand should eventually ease inflationary pressures and the CBRT is expected to kick off the rate cutting cycle later this year. We still think risks are tilted towards higher inflation (and rates) for longer.

In Denmark, GDP grew 0.6% in Q2, mainly because of increased goods export. The Q2 growth was more modest than we expected, however, the Q1 decrease was revised down as well. Danish GDP fluctuates quite a bit now due to production in the pharmaceutical industry causing big movements. We expect growth to continue to spread also outside the pharmaceutical industry, which will help the economy grow for the rest of 2024.

The rebound in Oil prices proved short-lived and prices have slipped towards the low from two weeks ago. Other than reports on the tense geopolitical situation in the Middle East, there has been little news to drive the oil market. We further note that oil prices have failed to find support from the weaker USD. We think the weak sentiment reflects concerns over whether the US economy is slipping into recession and that is unlikely to go away in the near term.

Market movements

Equities: Global equities were lower yesterday, breaking a long streak of gains. There was basically no top-down data to significantly impact the market, so it seems reasonable to attribute the downturn to some investors taking profits after a sustained period of gains.

Notably, the energy sector was the biggest loser yesterday and has been on a downward trend lately, with oil prices declining in five of the last six sessions. Additionally, banks, particularly regional banks in the US, were sold off yesterday. US regional banks lost 2% and continue to be indicative of how investors view the soft-landing and small-cap outlooks. As many people enjoyed vacations in July, it is maybe worth mentioning that July was the peak month for the soft-landing narrative, with US regional banks rising more than 20% during the month. In the US yesterday, Dow was down 0.2%, S&P 500 decreased by 0.2%, Nasdaq dropped by 0.3%, and Russell 2000 fell by 1.2%. The negative sentiment is continuing in Asia this morning with most indices lower. US and European futures are mixed.

FI: Global bond yields declined yesterday, and the US curve steepened ahead of the speech from Fed Chairman Powell at the Jackson Hole conference. Today, we have the minutes from the latest Fed Meeting, which should also confirm that the Federal Reserve is on track to deliver rate cuts. Furthermore, the US Bureau of Labor Statistics will publish revisions to the nonfarm payrolls and there is a very wide estimate for the revisions. A significant downward revision would be supportive for a steeper curve and lower yields.

FX: SEK rallied after the Riksbank delivered the expected 25bp cut and signalled more cuts to come this year. The USD stayed on a weak footing with EUR/USD eclipsing the 1.11 mark.