Sweden’s inflation is perhaps the most striking of all, with its oya print surprising to the upside by +0.3% (to 12%). Sweden’s run- rate inflation remains towards the top of its fifteen-month range, suggesting limited overall disinflationary progress at this point (Exhibit 8).
Stagflationary hikes have the potential to break this year’s FX-rates correlations. Exhibit 9 juxtaposes YTD changes in our economists’ CPI & GDP forecasts; the upper left quadrant is the stagflationary inflation-higher / growth- lower section. Unlike last year, in which much of G10 (ex- AUD) ended here (the Euro bloc most of all), SEK stands mostly alone. EUR and UK growth has been revised higher, while UK CPI has been revised substantially despite still- elevated run-rates and levels; it is understandable why hawkish repricing of the respective central banks against this growth backdrop have been construed as more straightforwardly currency-positive. What is perhaps most stunning of all for SEK on a simple stagflationary assessment is that it has simultaneously had the most traction both on 1) housing (prices collapsed, debate service ratios high) and 2) unemployment, which really illustrates the outstandingly-difficult job facing the Riksbank at the moment. Bottom line is that further price pressure supporting SEK yields should be less and less currency-positive as time goes on. And if banking stress persists and the growth dynamic remains under pressure, then any additional hikes from some of these CBs should not be perceived as straightforwardly currency-positive, and may instead revert to last year’s currency weakness given concerns about cyclical risks. - J.P. Morgan Strategy
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