Headwinds for scandies

Headline inflation is easing but service inflation remains worryingly high

Headline inflation has continued to move lower in most regions driven by weaker energy-, freight rate- and goods price impulses. Meanwhile, importantly, core inflation remains sticky as evident from the continued rise in service inflation in most countries. These opposing forces pose a challenge for central banks when balancing the fight against elevated core inflation against a weakening growth backdrop - especially given the time lag from policy changes to when the impact has fully fed through to the real economy. In line with market expectations, we think the Fed has delivered its last rate hike for this hiking cycle. However, we think the current 65bp of rate cuts priced for the rest of the year is too aggressive. Declining headline inflation has eased the pressure on most central banks to deliver further rate hikes. Meanwhile, Norges Bank and Bank of England increasingly look challenged by the inflation outlook amid resilient growth and - in terms of Norges Bank - a weakening currency. Worries with respect to the banking sector remains a market theme but in our view this is a natural symptom of the sharp tightening of monetary policy over the past year.

USD positive, SEK negative and near-term headwinds for NOK

EUR/USD has recently faced renewed headwinds, pushing the cross back below 1.10. The move lower was not least aided by relative rates, relative growth surprises and the outlook for relative liquidity situations. Likewise, EUR/GBP has recently breached the 0.87 level, the lowest level since December 2022. Although headwinds have eased slightly, the NOK has suffered from continued large fiscal selling from Norges Bank. EUR/SEK has moved lower over the last weeks on central bank repricing. The JPY has been the big underperformer over the last month driven by a combination of higher global yields and a soft Bank of Japan.

We maintain our strategic case for a lower EUR/USD based on relative terms of trade, real rates and relative unit labour costs. Likewise, we see the prospect of the USD finding further near-term support despite the impending Fed pause. We remain bearish SEK over the medium term on the back of relative monetary policy, the bleak growth outlook globally and a relatively worse outlook for the Swedish economy compared to peers. We have a near-term negative stance on NOK given a mismatch in fiscal FX transactions and shaky global risk appetite. However, we still believe in a more bullish secular case for energy and by extension NOK over the coming 5 years, but highlight the risk that our bullish NOK view could take longer to play out.

A key assumption is that of a re-tightening of global financial conditions. Risks to this assumption primarily lie in the combination of a sharp drop in core inflation and a more resilient global economy than what we pencil in.

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