POSITION: No Current Position
Sweden (like much of the Eurozone) is experiencing strong deflationary pressure as its recession stokes unemployment and saps output, exports, and consumer demand.
CPI fell in March to 0.2% Y/Y, the lowest rate in four years, from 0.9% annually in February. Economists forecasted inflation to fall to 0.5%. This deflationary data will surely encourage the Swedish Central Bank (Riksbank) to cut interest rates when it meets next week. In interviews Riksbank Governor Stefan Ingves said he has not ruled out cutting rates to zero to guide the largest Nordic economy out of recession.
Despite Fitch Ratings AAA credit rating on Sweden’s sovereign debt there’s still uncertainty surrounding Swedish banks, many of which were primary lenders to the Baltic states, countries that are now in the deepest recession within Europe. The resulting $100 Billion of Swedish bank write-offs will continue to strain government budgets and lending. The economy has suffered greatly from the pullback in export demand from the Eurozone, in particular in the car industry. Cash-strapped GM and Ford are presently looking for buyers for Saab and Volvo due to unprofitable sales. For a country of 9 Million, the estimated 15-20K jobs GM provides in Sweden is a number not to be overlooked.
From a monetary standpoint, the Central Bank is running out of room to cut the interest rate, which stands at 1%, to help lessen the downturn for an economy forecast to decline 4.2% this year. We do not have a position in Sweden or in Scandinavia and believe recovery in the region and throughout Western Europe should lag the US’s.