Preview: Norges Bank December Meeting Kyrre Aamdal, DNB Markets 5 December 2017
Preview: Thursday 14 December at 10:00 CET Norges Bank s Monetary Policy Meeting September meeting: Sight deposit rate unchanged at 0.50%, as widely expected Steeper rate path: Rate path unchanged until Q2 2018, slightly raised thereafter current assessment of the outlook and the balance of risks suggests that the key policy rate will remain at today's level in the period ahead (Unchanged from June) This time we expect Norges Bank to: Keep policy rates unchanged Raise interest rate path, signalling rate hike early 2019 We expect Norges Bank to keep policy rate at 0.50% until September 2019 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 Norway: Key policy rate Percent 0.00 2015 2016 2017 2018 2019 2020 Actual MPR 3/17 DNB Markets Source: Thomson Datastream/Norges Bank/DNB Markets page 2
International development Growth and inflation prospects GDP-growth: In general small differences between Norges Bank s forecasts and Consensus. Consensus 2018-forecasts little changed from September to November, Norges Bank may adjust marginally upwards Inflation: Norges Bank may adjust Swedish inflation downwards. Assessment: Will probably not affect the rate path Table Economic Forecasts NB Sep CF Sep NB Sep CF Sep CF Nov CF Nov CF (Nov - Sep) GDP-growth 2018 2019 2018 2019 2018 2019 USA 2.2 2.4 2.1 2.5 2.1 0.1 Euro zone 1.7 1.8 1.6 1.9 1.6 0.1 UK 1.5 1.4 1.6 1.4 1.7 0.0 Sweden 2.5 2.6 2.1 2.6 2.1 0.0 China 6.0 6.4 5.7 6.4 0.0 Trading partners 2.4 2.4 2.3 2.5 0.1 Inflation USA 2.2 1.9 2.3 2.0 2.3 0.1 Euro zone 1.3 1.3 1.5 1.3 1.5 0.0 UK 2.5 2.6 2.3 2.6 2.3 0.0 Sweden 2.2 1.9 2.9 1.9 2.1 0.0 China 2.2 2.1 2.7 2.1 0.0 Trading partners 2.0 1.8 2.2 1.8 0.0 Source: Norges Bank (MPR 1/17)/Cons ens us Econom ics/dnb Markets page 3
Foreign Forward Interest Rates 3m Forward Not Much Changed From the week before Norges Bank s September meeting, foreign FRAs for 2017 to 2020 are almost unchanged. The USD curve is higher, while SEK forwards are down. Since September 2y10y curves have flattened, most for USD with 10 bps Major trading partner currencies: EUR, USD, SEK and GBP Assessment: Foreign rates should not move rate path much Major trading partners: 3m Forwards, % 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00-0.25-0.50 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 0.08 0.06 0.04 0.02 0.00-0.02-0.04 Changes in 3m forwards for Norway's trading partners -0.06 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 15-Sep-17 01-Dec-17 15-Sep-17 Source: DNB Markets Source: DNB Markets page 4
1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 I-44 and IR Differentials From Q1 2017: Norges Bank's estimates Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 IR Differential Source: Norges Bank/DNB Markets I-44 (rha) 110 105 100 95 90 85 80 Interest rate differentials The spread Has Not Fallen Much Also 3m NOK forwards have fallen and the spread has narrowed a few basis points. Lower spread than expected should in isolation imply a weaker NOK 0.00 NOK: 3m Forw ards, change in %- points in spread foreign currencies -0.02-0.04-0.06-0.08-0.10-0.12 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 15-Sep-17 til 01-Dec-17 Source: DNB Markets page 5
Foreign Exchange Norway: I-44 lower than forecasted So far in Q4 I-44 has been 2% higher than forecasted by Norges Bank (in September) and current level is 5% above the Q4 forecast. The oil price was expected to be just below 55 USD/bbl in Q4. Will contribute to increase rate path 115 Norway: Import-weighted NOK (I-44) 110 105 100 95 Nov-16 May-17 Nov-17 May-18 Nov-18 Actual NB MPR3/17 So far this Q Current Source: Thomson Datastream/Norges Bank/DNB Markets page 6
Money market premiums and bank margins 3m NIBOR has been low So far in Q4 3m Nibor has been averagely 0.80%, vs Norges Bank s forecast of 0.85%, due to lower money market premiums Lower risk premiums from abroad has been the main contributor 1.90 1.70 1.50 1.30 1.10 0.90 0.70 3m Nibor per cent 0.50 Jan-16 Jan-17 Jan-18 Jan-19 Actual Market PR3/17 Source: Thomson Datastream/Norges Bank/DNB Markets 1.50 1.25 1.00 0.75 0.50 0.25 0.00 Norway: 3m NIBOR Per cent -0.25 Sep-16 Jan-17 May-17 Sep-17 Premium from EURUSD CBS Risk premium in LIBOR NOK OIS and basis Premium on USD Kilde: Thomson Reuters/DNB Markets page 7
Money market premiums and bank margins Higher bank margins Bank margins have increased, partly because new mortgages rates have been steady while 3m Nibor has fallen. Stronger regulation has contributed to tighter credit standards 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Interest rates Per cent 0.0 Nov-14 Nov-15 Nov-16 Nov-17 New Mortgages 3m NIBOR Policy rate Source: Thomson Reuters/Statistics Norway/DNB Markets 1.5 1.0 0.5 0.0-0.5-1.0 Credit standards, households Actual developments, projection for next quarter -1.5 Q4 2012 Q4 2013 Q4 2014 Q4 2015 Q4 2016 Q4 2017 Rate margin Next 3 months Source: Norges Banks utlånsundersøkelse/thomson Datastream/DNB Markets page 8
Capacity utilisation Norway: Capacity Utilization Slightly Higher Regional network report: Slightly higher capacity utilisation Retail sales has slowed. Confidence normal to high Home price growth has slowed so far this year with falling prices since April. Household credit growth still above income growth, but has fallen recently LFS unemployment has dropped, but employment growth slow. Registered unemployment suggest further improvements in labour market. Manufacturing production is improving, but several sectors lag. 2 Norway: Macroscore Average of sub indices 4 Reg. network. Change Last 3m and next6m. Scale -5 to +5. Prod. rha 8 1 0-1 3 2 1 0 6 4 2 0-2 Nov-11 Nov-13 Nov-15 Nov-17 Total Companies Households Source: DNB Markets -1-2 -2-4 Apr-08 Apr-10 Apr-12 Apr-14 Apr-16 Apr-18 Production Employment Source: Norges Bank/DNB Markets page 9
Capacity utilisation GDP-growth in line with expectations Mainland GDP growth was 0.6% q/q in both Q2 and Q3. The outcome was in line with Norges Bank s estimate for both quarters. Statistics Norway lowered forecast for mainland growth in 2017 by 0.1pp to 1.9%, but raised next year by 0.4pp, partly due to higher petroleum investments Norges Bank forecasted Mainland GDP growth to 2.0% in 2017 and 2018 GDP-revisions along with weaker Q4 points towards lower 2017-growth Assessment: Capacity utilisation small positive effects on the rate path 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00 Norway: Mainland-GDP -0.25 Q1 2013 Q1 2015 Q1 2017 %, q/q, sa., lha %, y/y, sa., rha Source: Statistics Norway/Thomson Datastream/DNB Markets 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5 6.0 5.0 4.0 3.0 2.0 1.0 Norway: Unemployed Per cent of labour force 0.0 Nov-07 Nov-09 Nov-11 Nov-13 Nov-15 Nov-17 Reg.+measures LSF Reg. Source: Thomson Datastream/DNB Markets page 10
Inflation Norway: Inflation in line with expectation Core inflation has been low, but in line with Norges Bank s expectations Inflation expectations well anchored. The implicit real wage expectations are roughly 0.5% in the 5y horizon. 5.0 4.0 3.0 Norway: Core inflation Actual (solid) vs Norges Bank's forecast (dotted) y/y, per cent 4.0 3.5 3.0 Forventet inflasjon om fem år Partene i arbeidslivet 2.0 2.5 1.0 2.0 0.0 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 CPI-ATE Source: Statistics Norway/DNB Markets 1.5 Q4 2007 Q4 2009 Q4 2011 Q4 2013 Q4 2015 Q4 2017 Arbeidsgivere Arbeidstakere I alt Kilde: Thomson Datastream//DNB Markets page 11
Preview: Thursday 14 December at 10:00 CET Summary Meeting on Wednesday 13 December with press statement due at 10:00 CET on Thursday 14 December. Press conference starts 10:30 CET Global outlook little changed, but inflation outlook dampened Global interest rates should not affect rate path much The drop in money market premiums are counteracted by higher bank margins, but might on the margin add to higher rate path Capacity utilisation may contribute positively to rate path The inflation outlook has not been changed to any large extent High household credit growth, but housing prices are falling. Reduced need for leaning against the wind Major question: How much will recent weakness of the NOK lift the rate path? page 12
Preview: Thursday 14 December at 10:00 CET Assessment Norges Bank has forecasted inflation to 1½% over the next years ending at 1.7% in 2020. Long-term forecasts may be increased to 2.0%, but still be well below target Major reason to increase inflation forecast and capacity utilisation is the weakness of the NOK. We think Norges Bank will be careful to put the weak NOK in play and expect Norges Bank to be cautious to signal rate hike much earlier than the ECB We expect a rate path indicating the first rate hike in January or March 2019. We hence expect rate path to be increased 11 bps in Q1 2019 and 17 bps as average for 2019. For 2020 we forecast 30 bps increase in the rate path. 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 Norway: Policy rate Norges Bank's rate paths, quarterly average, % 0.00 Q1 17 Q1 18 Q1 19 Q1 20 PR3/17 Forecast MPR 3/17 Source: Thomson Datastream/Norges Bank/DNB Markets page 13
DNB Markets Macro Research Contact details Kjersti Haugland Chief Economist, Euro area +47 24 16 90 01 / +47 917 23 756 kjersti.haugland@dnb.no Jeanette Strøm Fjære Economist, Norway and Sweden +47 24 16 90 03 / +47 920 37 011 jeanette.strom.fjare@dnb.no Ole A. Kjennerud Economist, China and Japan +47 24 16 90 07 / +47 477 57 482 ole.kjennerud@dnb.no Knut A. Magnussen Senior Economist, USA, UK and Brazil +47 24 16 90 04 / +47 476 04 046 knut.magnussen@dnb.no Magne Østnor FX Strategist +47 24 16 90 06 / +47 907 47 902 magne.ostnor@dnb.no Marit Øwre-Johnsen FX Analyst +47 24 16 90 08 / +47 970 42 190 marit.owre-johnsen@dnb.no Kyrre Aamdal Senior Economist, Norway, Sweden, interest rates +47 24 16 90 02 / +47 906 61 112 kyrre.aamdal@dnb.no page 14
Important/Disclaimer This note (the Note ) must be seen as marketing material and not as an investment recommendation within the meaning of the Norwegian Securities Trading Act of 2007 paragraph 3-10 and the Norwegian Securities Trading Regulation 2007/06/29 no. 876. The Note has been prepared by DNB Markets, a division of DNB Bank ASA, a Norwegian bank organized under the laws of the Kingdom of Norway (the Bank ), for information purposes only. The Note shall not be used for any unlawful or unauthorized purposes. The Bank, its affiliates, and any third-party providers, as well as their directors, officers, shareholders, employees or agents (individually, each a DNB Party ; collectively, DNB Parties ) do not guarantee the accuracy, completeness, timeliness or availability of the Note. DNB Parties are not responsible for any errors or omissions, regardless of the cause, nor for the results obtained from the use of the Note, nor for the security or maintenance of any data input by the user. The Note is provided on an as is basis. DNB PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE NOTE S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE NOTE WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall DNB Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the Note, even if advised of the possibility of such damages. Any opinions expressed herein reflect the Bank s judgment at the time the Note was prepared and DNB Parties assume no obligation to update the Note in any form or format. The Note should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. No DNB Party is acting as fiduciary or investment advisor in connection with the dissemination of the Note. While the Note is based on information obtained from public sources that the Bank believes to be reliable, no DNB Party has performed an audit of, nor accepts any duty of due diligence or independent verification of, any information it receives. Confidentiality rules and internal rules restrict the exchange of information between different parts of the Bank and this may prevent employees of DNB Markets who are preparing the Note from utilizing or being aware of information available in DNB Markets/the Bank which may be relevant to the recipients of the Note. The Note is not an offer to buy or sell any security or other financial instrument or to participate in any investment strategy. Distribution of material like the Note is in certain jurisdictions restricted by law. Persons in possession of the Note should seek further guidance regarding such restrictions before distributing the Note. The Note is for clients only, and not for publication, and has been prepared for information purposes only by DNB Markets - a division of DNB Bank ASA registered in Norway with registration number NO 984 851 006 (the Register of Business Enterprises) under supervision of the Financial Supervisory Authority of Norway (Finanstilsynet), The Monetary Authority of Singapore, and on a limited basis by the Financial Conduct Authority and the Prudential Regulation Authority of the UK, and the Financial Supervisory Authority of Sweden. Details about the extent of our regulation by local authorities outside Norway are available from us on request. Additional information for clients in Singapore The Note has been distributed by the Singapore Branch of DNB Bank ASA. It is intended for general circulation and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should seek advice from a financial adviser regarding the suitability of any product referred to in the Note, taking into account your specific financial objectives, financial situation or particular needs before making a commitment to purchase any such product. You have received a copy of the Note because you have been classified either as an accredited investor, an expert investor or as an institutional investor, as these terms have been defined under Singapore s Financial Advisers Act (Cap. 110) ( FAA ) and/or the Financial Advisers Regulations ( FAR ). The Singapore Branch of DNB Bank ASA is a financial adviser exempt from licensing under the FAA but is otherwise subject to the legal requirements of the FAA and of the FAR. By virtue of your status as an accredited investor or as an expert investor, the Singapore Branch of DNB Bank ASA is, in respect of certain of its dealings with you or services rendered to you, exempt from having to comply with certain regulatory requirements of the FAA and FAR, including without limitation, sections 25, 27 and 36 of the FAA. Section 25 of the FAA requires a financial adviser to disclose material information concerning designated investment products which are recommended by the financial adviser to you as the client. Section 27 of the FAA requires a financial adviser to have a reasonable basis for making investment recommendations to you as the client. Section 36 of the FAA requires a financial adviser to include, within any circular or written communications in which he makes recommendations concerning securities, a statement of the nature of any interest which the financial adviser (and any person connected or associated with the financial adviser) might have in the securities. Please contact the Singapore Branch of DNB Bank ASA at +65 6212 0753 in respect of any matters arising from, or in connection with, the Note. The Note is intended for and is to be circulated only to persons who are classified as an accredited investor, an expert investor or an institutional investor. If you are not an accredited investor, an expert investor or an institutional investor, please contact the Singapore Branch of DNB Bank ASA at +65 6212 0753. We, the DNB group, our associates, officers and/or employees may have interests in any products referred to in the Note by acting in various roles including as distributor, holder of principal positions, adviser or lender. We, the DNB group, our associates, officers and/or employees may receive fees, brokerage or commissions for acting in those capacities. In addition, we, the DNB group, our associates, officers and/or employees may buy or sell products as principal or agent and may effect transactions which are not consistent with the information set out in the Note. Additional Information, including for Recipients in the In the United States: The Note does not constitute an offer to sell or buy a security and does not include information, opinions, or recommendations with respect to securities of an issuer or an analysis of a security or an issuer; rather, it is a market letter, as the term is defined in NASD Rule 2211. page 15