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.
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.
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.
Although Sweden's yield curve is visually steep, J.P. Morgan advises against betting on a flattening. The position is unattractive due to competing risks: the front-end could rally further on rate cut speculation, while intermediate yields could sell off if unfunded measures are announced in the upcoming April spring budget.