Following a major inflation surprise, the Norwegian front-end rates market rapidly priced out approximately 40 basis points of expected easing. J.P. Morgan's analysis concludes this significant move was a justified reset to a more realistic "on hold" policy outlook for 2026, rather than a speculative overreaction.
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While the Swedish market prices in an extended "on hold" policy from the Riksbank, a downside risk premium could build in the curve. This creates an asymmetric opportunity in long duration positions targeting mid-2026, where the possibility of hikes is negligible but the potential for lower yields offers attractive upside.
Sweden's 2026 budget introduced unfunded reforms worth 1.2% of GDP, far exceeding expectations. This large fiscal injection surprised markets, pushed interest rates higher, and shows how expansionary government spending can counteract a central bank's monetary policy signals.
Contrary to Norway, Sweden faces significant downside inflation risks. A forthcoming VAT cut in April, combined with large basket effects between March and May, is expected to push core inflation towards 0.5%. This will significantly undershoot the Riksbank's forecast and intensify pressure to ease monetary policy.
Despite strong economic data suggesting the Fed should hold rates, markets are pricing 40-50 basis points of cuts. This discrepancy is driven by political uncertainty around the appointment of a new Fed Chair, as the administration's focus on lower rates makes it difficult for markets to price out easing until the new leadership is confirmed.
The Riksbank cut rates, but its forward guidance and a dissenter's vote signal a very high bar for future easing. The move, based on forward-looking inflation expectations rather than current data, effectively marks the end of the easing cycle and creates opportunities for carry trades.
A historical review places 2026 in the second-lowest decile for central bank rate activity (hikes/cuts). This data strongly suggests a contained FX volatility environment, as significant vol spikes historically occur only during periods of extremely high or low central bank intervention.
The market is pricing in approximately three more rate cuts for next year, totaling around 110 basis points. However, J.P. Morgan's analysis, supported by the Fed's own dot plot, suggests only one additional cut is likely, indicating that current market pricing for easing is too aggressive.
The market is pricing 50 basis points of easing from Norges Bank by the end of 2026. However, strong growth, a solid labor market, and high inflation suggest the central bank will not deliver these cuts, implying that front-end Norwegian yields are biased higher.
Norge Bank's forecast includes an implicit easing bias, but strong demand, persistent inflation, and fiscal easing make actual rate cuts improbable. The market is currently overpricing the likelihood of the central bank delivering these cuts.
Norway's recent, broad-based inflation surprise was significantly driven by rent's increased weight in the CPI basket, now at 29%. This structural factor reinforces the view that underlying inflation is sticky, compelling the Norges Bank to keep policy on hold and lean against rate cuts through 2026.