GILT AUCTION PREVIEW: On offer next week

SPX: 5,981.0 (+0.4%); DJIA: 43,956 (+0.3%/+115pts); NDX: 21,039.2 (+0.7%).

Strong European equity performance has supported the Swedish krona today, helping to reaffirm bearish technical conditions in SEK crosses.

• After drifting away from multi-month lows through the course of last week, EURSEK, NOKSEK and USDSEK have snapped back lower today, with the latter down an impressive 1.4%. Initial support in USDSEK is the Feb 24 low at 10.5859.
• Meanwhile, focus in NOKSEK remains firmly on multi-year support around 0.9500 (the Aug 5, 2024 low is 0.9506). Rallies short of the 20-day EMA at 0.9628 will be considered corrective.
• The prospect of increased European (and especially German) defence spending has driven today’s equity rally, with Saab (+12.5%) leading in the OMX30.
• SEK strength comes despite the Riksbank’s February Business Survey containing mixed signals for the rate outlook. In our view, risks are still tilted towards one more cut in Q2.
• Although cost pressures have necessitated higher selling prices across industries, respondents suggest weak demand is limiting pricing power somewhat. Meanwhile, growth and employment signals remain subdued, while US tariffs add considerable uncertainty to the growth and inflation outlook.

Goldman Sachs note that “the announcement of an increase in UK defence spending to 2.5%/GDP has had little impact on yields. This is because, unlike in Germany where deficits are likely to increase following a rise in defence spending, the UK’s plan aims to be deficit-neutral, with offsetting budget tightening elsewhere.”

• They suggest that “there may be some limited spillover effect from German yields on the UK, but we think the macroeconomic effects of an eventual decline in underlying inflation and ongoing BoE rate cuts will continue to dominate.”
• They “continue to expect risk premium in the curve to decline over 2025 and maintain a recommendation for 10s30s flatteners.”
• They warn that “a key test for the government’s spending plans looms in late March as the OBR updates its projections but continue to think that an eventual fiscal backstop via adherence to the current budget rules should anchor yields.”