CANADA DATA: Retail Sales Beat In March, But Volumes Remain Subdued

Risk-off price action (USD & crude bid, equities and bonds offered) noted in recent trade.

• A re-airing of news surrounding Iranian attacks on vessels in the Strait of Hormuz and hardline rhetoric from the country re: the U.S. blockade of the Strait provide the apparent triggers, albeit contain little in the way of meaningful, fresh information.

OI data points to net long cover as gilt futures sold off on Tuesday. OI fell by ~9.1K or ~0.8%.  OI has moderated further from last Thursday’s multi-week peak, with the ongoing U.S.-Iran impasse limiting conviction.

Thedeen’s speech suggests the Riksbank isn’t currently in a rush to raise interest rates, and thus supports a rate hold on May 7. However, as noted at the March decision, there is clearly vigilance with respect to upside inflation risks. We consider Thedeen to be on the more hawkish side of the Executive Board alongside Seim. 

He outlines three potential policy responses to the Iran war, similar to ECB President Lagarde a few weeks ago:

1. “One option is to ‘wait and see’. This seems a fairly reasonable approach if uncertainty is high and the duration of the supply disruption is still unclear.
2. “Another option is to raise interest rates relatively sharply as a precautionary measure.”…. “One problem with this strategy is that if the shock has already subsided and inflation has begun to fall back before the interest rate increase has an impact, there is a risk that monetary policy will be sharply contractionary in a situation where the economy instead needs support.”
3. “A third option is to raise the interest rate, but to a relatively limited extent. This gives the central bank room to manoeuvre to assess how the economy is reacting, both to the shock itself and to the interest rate adjustment, before taking the next step.”…. “In practice, the difference between this approach and the ‘wait and see’ strategy is not very large. It is mostly a question of how quickly and how clearly the central bank signals that it is ready to act, given the uncertainty regarding the size and duration of the shock”

On the similarities and differences of the current shock relative to 2022, Thedeen references:

• The currency policy setting (1.75% policy rate vs 0% in 2022 + QE)
• The development of the krona (depreciating in 2022)
• Resource utilisation (higher than usual in 2022)
• Fiscal policy (more expansionary today vs 2022)
• The impact of the recent high inflation episode on current inflation perceptions.