Harr’s View: Challenges and opportunities in the Scandi markets

Good evening all

Today, I discuss Scandi markets in the context of global macro developments. To recap, we expect global growth to weaken further in coming months, before turning higher from Q2 onwards. This week, we received encouraging signs in the US-China trade talks (see here). A US-China trade deal and policy easing support our call for a turn in the industrial cycle later in H1. Last week, I argued that growth expectations might need to stabilise before equities head higher. This week, volatility across asset classes fell, while US equities rose and US credit spread tightened. The Fed’s clear signal of a pause in its rate hiking cycle, confirmed again this week, may be enough to stabilise markets. Alternatively, markets may already have adjusted growth expectations sufficiently downwards. The jury is still out. I certainly believe that stocks will outperform bonds in 2019, but timing is as always tricky.

How does our global outlook fit into our views on Scandi markets? We expect Sweden to slow substantially this year to 1.4% from an estimated 2.2% in 2018. This would be the weakest growth since 2013. Our forecast is in line with those of the Riksbank and the National Institute of Economic Research, but significantly below the Bloomberg consensus forecast at 2%. The market needs to get used to a slower Sweden. Over the next months, I expect the Swedish industrial cycle to slow due to the weak European manufacturing cycle. In fact, the Swedish cycle has held up surprisingly well, but now it is payback time. Moreover, flat real wage growth should dampen private consumption. However, I expect both those negative factors to turn positive later this year, if US and China reach a trade deal, while a more stable oil price should dampen Swedish headline inflation. We expect Swedish housing prices to fall in 2019, which could be an additional drag on investments and consumption.

Swedish inflation has surprised on the downside in recent months. Lower energy prices and a stronger SEK dampened imported inflation, while modest Swedish wage growth weighted on domestic inflation. The German and Swedish wage growth gap is now at its widest level since 2011. Swedish wages are only likely to catch up following the next round of the negotiated industry wages in spring 2020. We expect the Riksbank to keep the policy rate at -25bp in 2019. In contrast, the Riksbank expects to raise rates in October. I see two possible reasons for the divergence. Firstly, the Riksbank puts increasing focus on core inflation, which it expects at 1.8% in September - we believe it will be around 1.5%. Secondly, the Riksbank may be eager to take rates to zero despite low inflation. Markets are pricing in a 20bp rate hike for 2019, but around 25bp hike per year from 2020-24. In my view, markets are pricing too high a probability of a hike in 2019, but not enough rate hikes for 2020-24. As our Swedish Chief Economist Michael Grahn argues, market pricing for 2020-24 is the lower bound. Therefore, I believe Swedish interest rate curves should steepen. Meanwhile, the overall fair pricing of the Riksbank compared to recent years suggests that the SEK should appreciate mildly.

What about Norway? We expect the Norwegian economy to expand 2.6% this year - the strongest growth since 2012. That may seem a bit far-fetched with the oil price currently at USD60 per barrel. However, as our Norway strategists Frank Jullum and Kristoffer Kjær Lomholt argue, cost cutting in the Norwegian oil sector has pushed the average breakeven price for oil investments down to USD21 per barrel. This supports strong oil investment growth contributing more than 0.5pp to GDP growth in 2019. In addition, Norway is more detached from the European cycle than Sweden. Hence, the current Eurozone slowdown is less of a worry for Norway. We expect Norges Bank to hike rates both in March and in September with an average of two yearly rate hikes during 2020-21. Strong domestic growth and higher policy rates should support a gradual strengthening of the NOK and flatter curves.

As for Denmark, the market focuses on whether Danmarks Nationalbank (DN) will deliver an independent rate hike to defend the EUR-peg. We do not believe so. Over the course of 2019, the DKK should benefit from a US-China trade deal, improved global growth prospects and a recovery in equity markets. In any case, our DKK strategist Jens Nærvig Pedersen argues that DN is likely to intervene for at least DKK50bn if needed to cap EUR/DKK before opting to hike rates unilaterally. A final point on the probably biggest event next week - the vote on Tuesday in the House of Commons on Theresa May’s Brexit deal. We expect May to lose the vote, which opens up a Pandora’s Box of possible outcomes (see here). This should not be a surprise to markets. Hence, we expect spill over to global and Scandi markets to be limited next week, but markets are likely to become more nervous if we approach the deadline without a deal. That was all for today’s comment.

On that note, I wish you a great Sunday night and coming week, best regards Thomas.