HYBRIDS: Hybrids: Week in Review

Citi believe that “the inference for the € front-end from a neutral FOMC meeting would likely be limited.”

• They note that “while both € and $ STIR futures have re-priced aggressively since the 18 Dec FOMC, whites drove the cheapening on the Euribor strip, while the SOFR selloff has been led by blues and golds.”
• They go on to suggest that “the lack of compelling co-movement between the two front-ends has emerged over the last couple of weeks, more so in reds.”
• However, they think “that a common richening trend will be asserted in the second half of the year.”
• Given that their economists “still expect slowing inflation and growth to ultimately lead to five 25bp cuts beginning in May for the Fed. While for the ECB, their expectation is for continued 25bp cuts until an expansionary 1.5% depo rate is reached in September.”

SEK saw a small knee-jerk weakening following the Riksbank decision, but EURSEK and NOKSEK have since moved off intraday highs.

• This reaction is unsurprising: The 25bp cut was not quite fully priced into markets as of yesterday, but the lack of forward guidance in the policy statement has countered some of the dovish signal from the rate decision itself.
• The tone of Governor Thedeen’s press conference at 1000GMT/1100CET will be key in shaping the overall reaction in the krona.
• Looking ahead, key focus will be on the January meeting minutes (released February 4). It will be interesting to see if the more dovish Executive Board members (Breman, Jansson and Bunge) signal a willingness to deliver more cuts in H1 ’25, which would be more aggressive than the December MPR rate path. 

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