Scandi Markets ahead Divergent monetary policy between Norway and Sweden

Transcription

1 Investment Research 18 November 2013 Divergent monetary policy between Norway and Sweden We believe the Riksbank will cut rates by 25bp in December. The Riksbank s three weeks old inflation forecast was 0.4pp off the mark and we find nothing that implies a return to its path when November numbers are published a couple of days before the monetary policy meeting. This week business (BCI) and consumer (CCI) confidence surveys from the National Institute for Economic Research (NIER) are in focus in Sweden. We expect some moderation, since the PMI normally leads the BCI. Statistics Sweden will also publish the investment survey that will provide the last piece of data before the Q3 GDP data that will be released on 29 November. Recommended readings from Danske See our monthly Yield Forecast Update that covers Scandi and core markets See FX Forecast Update for our latest FX Forecasts Last week we presented in Strategy Sweden: Rate cut in December and low for long not fully priced yet a number of strategies that will benefit from an upcoming rate cut from the Riksbank. We also keep our outright negative short-term view on the SEK and we have a 1M forecast of 9.00 for EUR/SEK. We also reiterate our positive view on NOK/SEK given the monetary policy outlook between Norway and Sweden. We now see value in short EUR/NOK on a medium horizon and present a number of risk reversal strategies utilising the attractive option market skew in EUR/NOK. In Denmark we see value in Danish linkers. The Swedish surprise index is weak Attractive option skew in EUR/NOK Source: Danske Bank Markets, Macrobond Source: Danske Bank Markets, Nationalbanken Chief Analyst Arne Lohmann Rasmussen arr@danskebank.dk Important disclosures and certifications are contained from page 9 of this report.

2 The scene is set for a rate cut in Sweden In Sweden, the week ahead will probably provide food for thought since we receive a new bout of survey data, which has us puzzled being strong for long without any noticeable impact on real, hard, data such as industrial production. Sweden: Surveys heading in the right direction This week around it is the business (BCI) and consumer (CCI) confidence surveys from the National Institute for Economic Research (NIER) that hit our screen on Friday (at 09:15 CET). We expect some moderation, since the PMI normally leads the BCI, but this is a weak forecast, as we fail to grasp the large and persistent discrepancies to real data. However, a day before (on Thursday, at 09:30 CET), Statistics Sweden will publish the investment survey providing the very last piece of public data before Q3 GDP (released 29 November). We believe the Riksbank will cut rates by 25bp in December. The Riksbank s three weeks old inflation forecast was 0.4pp off the mark and we find nothing that implies a return to its path when November numbers are published a couple of days before the monetary policy meeting. In fact, 10 out of 15 inflation sub-components were down m/m and inflation again turned to deflation (CPI). Moreover, there is no longer any visible upward trend in the data, quite to the contrary. The repo rate is already extremely low and we still await stronger hard data (survey data continue on a strong note). This means that the Riksbank has to be firing harder and stronger not to risk disinflationary tendencies becoming entrenched. This last proposition might seem a bit exaggerated but the fact is that wage and rent growth are at levels we have only seen in 2008/09, in the wake of the financial crisis. Admittedly, upcoming data might relieve some of the pressure on the Riksbank to cut and the past week s labour force survey was, on all accounts, a tad stronger than expected. However, the zest of the arguments is intact and there must be a limit to how much and how long the Riksbank can be wrong. Sources: Macrobond, NIER Riksbank CPIF-inflation forecasts Note: Q4 CPIF based on October outcome Sources: Macrobond, Riksbank. Danske Bank calculations How to play a Riksbank rate cut in the FI market Last week we presented in Strategy Sweden: Rate cut in December and low for long not fully priced yet a number of strategies that will benefit from an upcoming rate cut from the Riksbank. We recommended in the Swedish fixed income universe to: Receive RIBAMAR14 and/or 6M STINA Steepen 5s10s Do carry trades in covered bonds, hedge with BEI spread Receive SEK 5Y versus EUR See also Strategy: Receive 2Y SEK/EUR swap spread, 1Y forward. Here we argue that that the market cannot push EUR rates much lower from current levels in the 2Y-3Y segment unless a deposit rate cut is being discounted once again. The SEK leg is of course once again based on our Riksbank view November 2013

3 How to play a Riksbank rate cut in the FX market Our view that the Riksbank will cut rates is also expected to weigh on the SEK for the rest of On 12 November we entered a long position in NOK/SEK based on relative yields and relative inflation (SEK under pressure NOK/SEK supported by relative yields). For the rest of 2013 monetary policy in Norway and Sweden is expected to diverge. Norges Bank is expected to stay on hold December 17 given that core inflation is running at 1.9% y/y and as the NOK is significantly weaker than assumed by the Norges Bank in September. NOK/SEK has been in an uptrend since we entered the position, up more than 1% in three days, supported by relative yields. We continue to see further upside potential but, given surrounding uncertainties, on 15 November we chose to: lock in profit on half the position (ref ) and raise stop-loss to entry at on the remaining part. (see update here): Inflation divergence bolsters higher NOK/SEK Source: Macrobond We believe the SEK will trade on a weak note through year end and stick to our 1M target at 9.00 while acknowledging that the pair might get stuck above 9.00 for a period of time. EUR/SEK has already rallied very significantly in the last couple of weeks amid weaker than expected Swedish data and a re-pricing of the Riksbank in relation to the ECB. The krona is currently sensitive to incoming data and to relative yields which is something to keep in mind for the coming weeks, which are jammed with key figures ahead of the Riksbank December meeting. The market will have plenty of opportunities to trade the pair either higher or lower as the chances for a cut either rise or diminish November 2013

4 EUR/SEK higher with weaker-than-expected Swedish data... but has it peaked? Source: Macrobond The most important SEK drivers in terms of data are: GDP Q3 (29 Nov), Prospera inflation expectations (11 Dec), CPI (12 Dec) as well as soft data from NIER this Friday and PMI. To be honest, we were a bit baffled by Mr Ingves comment last week that the growing discrepancy between soft and hard data that has been so disturbing was completely normal in his book. While we think the balance of these numbers will in the end result in a Riksbank rate cut, in particular due to too low inflation, it should be noted that the Swedish surprise index looks toppish from a longer perspective, something that may after all contain the upside in EUR/SEK. The interest-rate market has priced in around 50% chance of a rate cut (until February) but EUR/SEK has surged more than what is normally justified by relative yields (beta). Hence, we believe that while there is still upside potential in a rate cut scenario most of the rally should already be behind us. EUR/SEK has run out of the normal territory Source: Macrobond, Danske Bank Markets 4 18 November 2013

5 The medium-term outlook for the Swedish krona We must not forget that this is a relative play, where the Riksbank is obviously not the only bank lowering rates and Sweden not the only country with low/falling inflation. On the contrary. So it is not evident that the currency with still positive rates should underperform vis a vis the EUR where the policy rate is nailed close to zero. Moreover, the fact that Swedish inflation continues to undershoot euroland means that the krona becomes more and more undervalued (EUR/SEK overvalued) in terms of purchasing power parity. In fact, most (all) long-term fundamental measures suggest EUR/SEK should eventually head towards and below Thus, we keep our 12M EUR/SEK target intact at For more on our medium to long term FX forecasts see FX Forecast Update: EUR underperformance expected in The SEK is cheap long term taking into account relative inflation E U R S E K 1 2,5 1 2,0 1 1,5 1 1,0 1 0,5 1 0,0 9,5 9,0 8,5 8,0 In f l a t i o n - a d j u s t e d E U R S E K N o m i n a l E U R S E K ,5 1 2,0 1 1,5 1 1,0 1 0,5 1 0,0 9,5 9,0 8,5 8,0 Source: Reuters Ecowin Norway: GDP-mainland growth to recover in Q3 In Norway lower inflation and lower global rates will pull down interest rate expectations when Norges Bank meets on 5 December, but the weak krone will pull more or less as strongly in the other direction. The key factor will therefore be the growth outlook for the Norwegian economy. Norway: No recession The coming week brings GDP data for Q3, and although these are now historical, they will still help give us a better picture of just how strongly the Norwegian economy is growing at the moment. Even with negative growth in private consumption and probably a negative contribution from net exports, we anticipate mainland GDP growth of 0.4% q/q in Q3 up from 0.2% q/q in Q3. There was strong growth in the output indices for manufacturing and, in particular, construction in Q3, and the LFS says that employment growth has picked up, which is normally a good sign of a change in activity. Furthermore, aggregate credit growth (C3 = domestic + external debt) has risen sharply, which may mean that investment activity has been higher than many think. Source: ReutersEcoWin, Danske Bank Markets If we are right in our forecast, or growth is even stronger, we expect many to revise their opinion of the chances of a serious downturn in the Norwegian economy next year. We believe that the GDP numbers will give support to the NOK. However, as we wrote in the latest issue of Scandi markets ahead, the trouble might not necessarily be over for the NOK. We often see that liquidity is weak in the Norwegian market in December and given that a "liquidity premium" was one of the reasons why the NOK suffered over the 5 18 November 2013

6 summer, we are becoming increasingly concerned for the NOK. The market has the "summer experience" in fresh memory. However, given that we do not see a rate cut from the Norges Bank and as the GDP numbers are expected to support this view, we recommend to utilise the option market skew that makes risk reversal strategies attractive when positioning for the downside in EUR/NOK. Using a risk reversal also makes the position less exposed to erratic moves in the currency cross. For more on our medium to long-term view on the NOK see the latest FX Forecast Update that we published on 15 November. Friday afternoon it was possible to enter the following risk reversal strategies in EUR/NOK: Risk reversal strategies for lower EUR/NOK (zero-cost) Example 1 Example 2 Example 3: 1x1.5 ratio Expiry Put Call Put Call Put Call 3M M M Source: Danske Bank Markets, Bloomberg (spot: ref. 8.26, indicative prices and zero-cost): Admittedly, the Norwegian krone has fallen sharply over the past week and a number of possible explanations have been circulating but we can see little foundation for the economic drivers that have been mentioned. First, the chances of a serious decline in house prices with significant consequences for the real economy are not especially high. Low interest rates, high incomes and low unemployment mean that few households are having problems servicing their mortgages. Few, therefore, are being forced to sell their homes, so the stock of unsold properties is unlikely to balloon. Turnover in the housing market has fallen but is still relatively healthy. Unless something happens to earnings capacity, the risk of a housing crash will remain limited. Second, the krone is by no means overvalued. Analyses pointing to differences in wage costs and productivity forget to take account of the strong rise in prices for Norwegian industrial output (excluding oil) over the past years. High wages are mainly a result of high producer prices bringing good profitability. NOK is weak Source: ReutersEcoWin Third, we are not convinced that the Solberg government will actually tighten fiscal policy significantly should the krone strengthen, even though the prime minister has clearly threatened to do so November 2013

7 Denmark - Strong demand for 10Y linkers - more to come The Danish linker attracted very strong demand at this week s auction (more than DKK6bn was sold) and there has been immediate performance in the 10Y BEI. We expect further performance in the Danish 10Y BEI going forward as more investors will be coming in. The Danish linker is on the brink of being included in Barclay s global linker index (WGILB). It is not clear whether it will be included already in Q1 next year (effective from Q2) at this point. Inclusion would require an outstanding amount of at least USD4bn and the current amount is now at USD3.94bn. However, at this point it is just a matter of time and it is likely that more investors will be entering ahead of inclusion. We still recommend buying Danish BEI and have added the strategy to our trade list. Unlike in most other places, inflation in Denmark was not only higher but also higher than expected in October, although a rate of 0.7% y/y cannot exactly be called high. As elsewhere, energy and food prices are exerting downward pressure but the annual rate is still rising due to the way Danish prices have moved over the past year. There was also an unexpectedly big increase in the cost of services. Danish inflation will probably continue to rise as the impact of various reductions in duties drops out of the data. Apart from increasing Danish inflation we also expect the linker from a future inclusion in Barclay s global linker index (WGILB). After this week s tap the outstanding amount is DKK21.99bn equivalent to USD3.94bn. Hence, whether the linker will be included at first chance will depend on the USDDKK at year-end and the outstanding amount (the Danish DMO often sells govies between auctions). When the bonds meet the requirements it will be included in the following quarter. Hence, if the outstanding amount at year-end exceeds USD4bn, it will effectively be included as of Q2. However, the fact that the Danish DMO decided to tap more than DKK6bn at this auction (at attractive level for the investor) suggests that the DMO is seeking a near-term inclusion which should lead to a broader investor base. Denmark: Higher inflation whichever way you look at it Source: Statistics Denmark We reiterate our recommendation to go long Danish 10 BEI via switching from the Danish 23 Nominal to the linker; for more see also Strategy: Buy DGBi 0.1% 2023 at Tuesday's auction, 11 November (see also the latest issue of Government Bonds Weekly). Performance in Danish BEI post auction - still attractive We expect Danish inflation to have bottomed Danske Bank's expectations for DK and EU inflation in Danish CPI, y/y % EUR HICP (ex tobacco), y/y % Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Source: Bloomberg, Macrobond and Danske Bank Markets Source: Bloomberg, Macrobond and Danske Bank Markets Otherwise, the Danish Fixed Income market continues to focus on the upcoming legislation regarding refinancing risks in the Danish mortgage market. For more see Danish Mortgage Bonds: Legislative text softer than previous law proposal November 2013

8 Scandi market movers ahead Scandi movers Event Period Danske Consensus Previous Tue 19-Nov 10:00 NOK GDP (total) q/q 3rd quarter 0.8% 10:00 NOK GDP (mainland) q/q y/y 3rd quarter 0.4% 0.2% Fri 22-Nov 9:15 SEK Manufacturing confidence Index Nov :15 SEK Consumer confidence Index Nov During the week 9:30 SEK Unemployment s.a. % Oct 8.0% Source: Danske Bank Markets 8 18 November 2013

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