Macro & FICC Research Published: 2022 04 04 13 12
What's up, Norway?
Economic activity to rebound
The national accounts for February to be published on Friday is this week’s highlight. A strong rebound in mainland GDP is expected reflecting the lifting of national restrictions. The market will closely watch data that could persuade Norges Bank to drop its cautious approach and speed up rate hikes. Existing home price data published this week is unlikely to be a trigger, but the 3.7% wage norm settlement in manufacturing over the weekend adds upside risk. A minimum of four more hikes this year is discounted in markets, a view we share. The krone is struggling with overvaluation, but seasonality is NOK-positive in April.
How strong will the economic rebound be?
This week’s main event is mainland GDP data for February on Friday. Economic activity was weak during the turn of the year as pandemic-related restrictions imposed in mid-December weighed on service sector production. Mainland GDP fell 0.9% m/m in January, but excluding volatile sectors the fall was limited to 0.3% m/m. The removal of all restrictions in two steps in early February suggests activity will rebound in February. This is also supported by the large drop in unemployment and card transaction data. Norges Bank concluded in its March MPR that economic activity appears to be rising rapidly and revised its near-term trajectory higher, estimating mainland GDP to rebound 0.8% m/m in February. We expect an additional boost from a rebound in volatile factors and forecast mainland GDP growth of 1.0% m/m while the consensus estimate is 0.9% m/m.
Ahead of the national accounts, production data will be published on Thursday. Manufacturing production showed a solid broad based 3.3% m/m rebound in January. This set the stage for a quarterly rise in production after three quarters with negative contributions to mainland GDP growth. A setback is likely in February, but more importantly for mainland GDP will be electricity production (included in the volatile sectors mentioned above) and service sector production which is not included in the monthly production data.
On Tuesday, existing home prices for March will be published. Home prices have started the year on a record- strong note with prices up 2.8% from December 2021. The price increase is to a large extent explained by temporary supply-side bottlenecks stemming from new regulation. These problems are transitory and the moderation in existing home prices are likely to resume later this year, further pressured by higher interest rates. For March, however, another monthly increase is likely. Norges Bank estimated a 0.4% m/m increase in March, which prices slowing thereafter to 0.1% m/m in April and 0.0% m/m in May. The bank forecasts full year growth of 4.4% in 2022 and 0.8% in 2023. Due to the temporary nature of recent price increases, we do not expect near-term upside surprises to impact monetary policy. That said, if prices don’t moderate in line with expectations during H2 2022, the argument that “uncertainties relating to the economic outlook and households’ response to higher interest rates warrant a gradual rise in the policy rate” would be
reconsidered.
Manufacturing wage deal points to upside risk
Over the weekend, the dominant trade union organization (LO) and the main private-sector employers’
organization the Confederation of Norwegian Enterprises (NHO) finally managed to reach an agreement in this year’s main wage settlement. Nominal wage growth was set at 3.7%, of which wage drift accounts for 1.5%-points and a carry-over of 0.9%-points. The wage deal implies positive real wage growth as CPI is estimated to average 3.3% in 2022. Norges Bank revised its wage growth estimate higher in the Mar MPR, forecasting an annual increase of 3.7% in 2022. Normally, higher wage drift has resulted in economy-wide wage growth exceeding the leading wage deal. In 2021, the norm was set at 2.7% while annual wage growth ended up at 3.5%. Norges Bank argues that “the rise in employment among low-wage employees in late 2021 and into 2022 will likely push down the average wage level in 2022 compared to the average in 2021”. Nonetheless, the first wage settlement points to upside risk to Norges Bank’s forecast.
Market pricing: At least 5 rate hikes before year-end
In last week’s What’s up, Norway? we concluded that the market pricing for Norges Bank gives a sense of déjà vu about the Fed. Rate hike expectations have moderated marginally over the past week, but still implies five full 25bps rate hikes in 2022 with a small likelihood of 6 hikes. The market thus believes Norges Bank will be forced to speed up the pace of rate hikes as the current path implies a 25bps hike at each of the remaining MPR meetings. We agree with the market, forecasting four additional rate hikes this year. The market still discounts a rate peak of 2.75% which is above Norges Bank’s 2.50%.
Opposing NOK forces in April
EUR/NOK rose by 2.2% last week and the NOK was on a G10 basis the worst performer while the EUR was the best performer followed by the SEK. The largest negative change took place on Thursday when the size of the NOK selling by Norges Bank surprised the markets. Norges Bank will sell NOK 2.0bn per day in April as large petroleum tax income will result in substantial transfers to the GPFG. Though the amount was larger than our estimate for April, our full-year forecast implies average FX purchases equivalent of NOK 2.5bn per day in April-December. Hence, Norges Bank will to some extent neutralize the tax-related NOK buying conducted by oil & gas companies in the market.
There are some opposing factors, but we expect EUR/NOK to head lower in April, though we are approaching a turning point. Short-term fair value is indicating NOK as overvalued while seasonality argues for NOK to strengthen in April. The factor with the largest impact lately is the rate spread and a turn for the higher has been the main reason for weaker NOK the past week. Norges Bank’s NOK selling increases structural liquidity which has pushed Nibor fixings and short NOK rates lower. As that effect fades, NOK rates should resume its correlation with dollar rates. As discussed in SEB FI & FX Strategy last week in the section “Short rate expectations: A relative perspective” we concluded that if any of the three EUR, USD or SWE rates can meet (and possibly exceed) expectations discounted by forwards it is USD short rates. While in comparison we regard Riksbank and ECB expectations as more stretched. Thus, the EUR-NOK rate spread should stabilize, and guide EUR/NOK lower this month, with the largest risk being a change in the view on ECB and yet higher EUR rates.
Looking into drivers our short-term fair value model is mainly driven by the rate spread where the impact is on the increase since mid-Jan 2022. Equity ratio is having some impact where the relationship now is positive i.e. EUR/NOK tends to head higher when EUR STOXX outperforms OBX. The oil price factors remain with virtually zero impact after the usual negative correlation has decreased since late Nov 2021. Despite EUR/NOK correcting higher last week, our short-term fair value model suggests NOK is still overvalued as the drivers also pushed fair value higher.
Compared to the other G10 currencies NOK is currently overvalued vs all but AUD and CHF. The largest overvaluation is vs the USD as USD/NOK trades 2.4 standard deviations below its fair value. However, we are now in April which is a month when the NOK tends to trade on the strong side and the USD on the week side, translating into USD/NOK it has fallen in April seven out of the past ten years and done so for two straight years. The table below shows April seasonality for G10 currencies.
Erica Dalstø erica.dalstoe@seb.no
4722827277
Karl Steiner karl.steiner@seb.se
46 70 3323104
