Scandi markets ahead Riksbank meeting, Inflation data and government bond auctions

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1 Investment Research General Market Conditions 9 February 2014 Scandi markets ahead Riksbank meeting, Inflation data and government bond auctions In Sweden, the Riksbank monetary policy decision (due Thursday at 09:30 CET) will dominate the week ahead and, with a high degree of confidence, we expect no change in the repo rate. This week Sweden is also tapping in the 5Y segment and we believe that the spread to Bunds is attractive given the recent widening to 100bp. We estimate that Norwegian core inflation held at 2.0% y/y in January, which is roughly in line with Norges Bank s projections in the December monetary policy report. This would put an end to any argument to revise down the interest rate path in the next report at the end of March, so pushing up yields and lifting the krone. Norges Bank is tapping its 5Y bond (maturity 22 May 2019) on Tuesday 11 February with NOK3bn. This 5Y bond is currently trading in the middle to high end of the range over the past year, in terms of yield spreads relative to both German and Swedish government bonds. We believe this offers reasonably good value compared with other solid sovereign government bonds. We continue to see upside for NOK/SEK based on relative core inflation and relative growth performance in Q4 13. We still expect to see an independent Danish rate hike over the next couple of months. But timing is difficult and we continue to argue that the Danish CITA is still too steep relative to the EONIA curve. Financial forecasts See our monthly Yield Forecast Update that covers Scandi and core markets See FX Forecast Update for our latest FX Forecasts Norway: higher inflation ahead Sweden: Inflation to stay low Source: Danske Bank Markets Chief analyst Arne Lohmann Rasmussen arr@danskebank.dk Important disclosures and certifications are contained from page 8 this report.

2 Sweden: Riksbank meeting and SGB 5y auction In Sweden, the Riksbank monetary policy decision (due Thursday at 09:30 CET) will dominate the week ahead and, with a high degree of confidence, we expect no change in the repo rate. This said, given the focus on wage developments and services inflation evident in, inter alia, the latest monetary policy discussions, there is at least a minute chance of a new recalibration of the Riksbank s models of the kind we saw last April. That could if the worst comes to the worst provoke a monetary policy reaction. However, there is no new information about inflation development in January as that is due to be released in the forthcoming week after the monetary policy meeting. If the Riksbank does not revise down its current inflation forecast, we see a risk that the January figure will again be well below its forecast. Our belief is, nonetheless, that the Riksbank will want to receive more information on the actual inflation developments before, possibly, acting again. Is there anything else that could affect the Riksbank? Our own calculations of October - December data outcomes imply that GDP Q4 q/q growth could very well be close to zero for the third consecutive quarter. That compares with the Riksbank's forecast of 0.6 % q/q. It does not necessarily affect the Riksbank s decision at all as Statistics Sweden is not due to release the official figures until 28 February. Sweden inflation to stay low Downside risks to Q4 GDP, Danske Bank Markets, Danske Bank Markets The Riksbank meeting will, of course, also take centre stage for the FX market. A confirmation that rates are on hold might give some short-term support to the SEK. However, with the inflation data coming up next week and the Q4 GDP numbers due on 28 February, the outlook for the SEK is not particularly constructive over the next couple of weeks. In that respect, we continue to be long NOK/SEK. See Scandi markets ahead published on 20 January. Elsewhere, we receive industrial capacity and inventories (Friday at 09:30 CET), the latter shedding some additional light on 2013 GDP growth. In Reading the Markets Sweden, we take a closer look at the implicit flattening of the Swedish yield curve expected in the market. After the recent decline in interest rates the yield curve has flattened by almost 20bp. We don t agree with market pricing that suggests that the yield curve will flatten by some (additional) 30bp over the next twelve months. Relative core inflation supports NOK/SEK. Danske Bank Markets 2 10 February

3 This implied flattening will, according to pricing, primarily be driven by higher short-end yields. The 2Y swap rate 1Y forward is 55bp above the current 2Y swap rate. We therefore recommend putting on a steepener by receiving 2Y 1Y forward against paying 10Y 1Y P/L: 135bp/105bp. Alternatively, we like steepeners on the government curve as well. Swedish 5Y looks attractive ahead of next weeks tap This week Sweden is tapping in the 5Y segment and we believe that the spread to Bunds is attractive given the recent widening to 100bp. Given our dovish view on the Riksbank we believe this is way too much, but we are in a situation with modest demand for SEK risk from both domestic and foreign investors. It will be interesting to see if the 5Y auction will be met with slow demand as seen in the switch auction in the new 10Y linker on Friday, where the bids were too low for the debt office to do the switch between the new 10Y linker and the 14Y linker. It is very rare to see the debt office refusing to do a switch (it has only happened three times in the switch auctions in the linkers since 2005). These switch auctions usually go very smoothly as was also seen in the recent switch auctions for the new 10Y nominal bond. The switch auctions in the linker continue on Monday and it will be interesting to see the demand. We expect that it will be back to normal standards and that the failed auction on Friday was a one-off event. For more on the Swedish government bond market see Government Bonds Weekly. 5y SGB spread to Germany too wide in our opinion Sourece: Danske Bank Markets, Bloomberg 3 10 February

4 Norway Inflation and 5y government bond auction Norwegian inflation was highly volatile in 2013 and core inflation was surprisingly low in December. Despite big fluctuations from month to month, there is no doubt that inflation is beginning to pick up. The main driver has been a rise in import prices due to the weakening of the krone last year. As the krone has continued to depreciate so far this year, we believe that we can generally expect higher levels of inflation. This is supported by quarterly import prices for consumer goods at the importer level, which climbed 10% y/y in Q4. Therefore, we estimate core inflation held at 2.0% y/y in January, which is roughly in line with Norges Bank s projections in the December monetary policy report. This would put an end to any argument to revise down the interest rate path in the next report at the end of March, so pushing up yields and lifting the krone. Norway: Higher inflation ahead The week also brings GDP figures for Q4 13. We saw growth slowing in 2013 due to weak growth in consumer spending, lower growth in housing investment and a weaker contribution from oil investment but there are no signs of any serious downturn in the Norwegian economy, as the fundamentals are still sound. We expect mainland GDP to grow 0.5% q/q in Q4, which is marginally higher than projected by Norges Bank in the December monetary policy report (0.43%). This would underline the absence of any need to cut interest rates in Norway and would also support the krone and lead to higher Norwegian yields. Core inflation at 2.0% underlines that Norway contrary to Sweden is not under threat from deflation at the moment. The same goes for growth in Q4. If we are correct in estimating growth at 0.5% q/q, it will also be in stark contrast to Sweden, where growth is expected to stay flat q/q. Hence, relative growth performance in Q4 is another argument for being long NOK/SEK. Norway housing crash not on the cards In fact, one of the main concerns for the Norwegian economy and the Norwegian krone (the Norwegian housing market) has become much smaller over the last couple of weeks. Interest costs still low Yes, house prices edged marginally down again in January after falling for four of the past five months, but this is actually very encouraging given all the fuss about a potential housing crash in Norway. The turnover was in fact 1% higher than in January 2013 and was actually the highest it has ever been in the first month of the year. Although the time to sell is undoubtedly increasing, the high level of turnover is a clear indication that the housing market is still functioning very well. In our view, the past two months have demonstrated very clearly that the market is beginning to stabilise and the risk of a crash is limited. Although house prices are high, as is household debt, low interest rates and high income levels mean that households debtservicing capacity remains good. As there is little reason to believe that this capacity will deteriorate markedly in coming years, the risk of a crash does not look like it is rising either. Quite the opposite: a period of unchanged house prices should bring down real prices and so reduce the risk February

5 Last week also brought news from the political side. Finance Minister Jensen said she would now allow a LTV at 90% for households with strong finances. It might in reality only be a small easing of the current flexible 85% LTV, but nevertheless demonstrates that also from the political establishment there is a strong willingness to support the Norwegian housing market. 5Y NGB auction to do well Norges Bank is tapping its 5Y bond (maturity 22 May 2019) on Tuesday 11 February with NOK3bn. This 5Y bond is currently trading in the middle to high end of the range over the past year in terms of yield spreads relative to both German and Swedish government bonds. We believe this offers reasonably good value compared with other solid sovereign government bonds. 5y NGB spread to Germany in the middle to the high end of range Sourece: Danske Bank Markets, Bloomberg The debt office has announced that issuance in 2014 is likely to be up to NOK70bn, which is roughly in line with issuance over the past two years, which again is substantially higher than it used to be back in 2011 and before. Hence, we still view issuance to be on the high side and this should imply, in our view, that Norwegian govies will continue to trade cheap to peers in This specific issuance, however, is relatively light, with NOK3bn for a 5Y bond. Therefore, we expect this auction to work out well in terms of pricing February

6 Denmark currency reserve numbers and DGB auctions Last week brought the Nationalbank's latest currency reserves data. The EUR/DKK has traded above the central parity rate of for most of this year, which has previously prompted the central bank to intervene, but this was not the case in January. EUR/DKK has been above central parity for a little while Hence, it seems that despite the negative carry on DKK positions the inflow from, among other things, the huge Danish current account surplus was enough to keep EUR/DKK stable. But that said, after the ECB announcement last week the negative carry on DKK in the FX forward market is once again relatively high. We therefore stick to the view that eventually the Danish central bank will need to intervene to support the krone and subsequently independently hike the deposit rate by 10bp. However, one independent rate hike is, in our view, more than enough to support the krone. In other words, we stick to the view that the Danish CITA curve is still too steep relative to the EONIA rate. CITA curve too steep relative to EONIA rate 1.00% CITA & EONIA forward market 30bp 25bp 0.80% 20bp 0.60% 15bp 10bp 0.40% 5bp 0bp 0.20% -5bp -10bp 0.00% -15bp Feb14 Aug14 Feb15 Aug15 Feb16 Aug16-20bp -0.20% -25bp Spread (rhs) DKK, 07FEB2014, EOD EUR, 07FEB2014, EOD Sourece: Danske Bank Markets, Bloomberg Finally, it is worth keeping an eye on January inflation. There is normally a fall in prices from December to January and we expect this pattern to be repeated with a decrease of 0.1% m/m. We expect the annual rate of inflation to rise, however, from 0.8% in December to 1.1% in January, due partly to the abolition of the fat tax at the start of 2013 no longer affecting the data. Food prices may also have risen further than usual in January, as seen in Germany. It must be stressed, however, that inflation is always less predictable in January than otherwise, because many prices are revised only at the beginning of the year. Danish inflation has bottomed out 6 10 February

7 Scandi market movers ahead Key Data and Events in Week 7 Monday, February 10, 2014 Period Danske Bank Consensus Previous 9:00 DKK Current account DKK bn Dec :00 DKK Eksport (s.k.) DKK bn Dec 9:00 DKK CPI m/m y/y Jan -0.1% 1.1% -0.1% 0.8% 10:00 NOK Producer prices m/m y/y Jan 1.6% 4.8% 10:00 NOK Consumer prices m/m y/y Jan -0.1% 2.0% 10:00 NOK Core inflation (CPI-ATE) m/m y/y Jan -0.5% 2.0% -0.3% 2.1% -0.1% 2.0% Tuesday, February 11, 2014 Period Danske Bank Consensus Previous 8:00 SEK PES Unemployment % Jan 4.6% 9:00 DKK New car sales, s.a. (Private households) Jan Wednesday, February 12, 2014 Period Danske Bank Consensus Previous 10:00 NOK GDP (mainland) q/q 4th quarter 0.5% 0.4% 0.5% 10:00 NOK GDP (total) q/q 4th quarter 0.7% Thursday, February 13, 2014 Period Danske Bank Consensus Previous 9:30 SEK Riksbank, rate decision % Feb 0.75% 0.75% 9:30 SEK Unemployment % Jan 7.5% 9:30 SEK Unemployment s.a. % Jan 8.0% 18:00 NOK Norges Bank's Gov. Olsen makes annual speech Friday, February 14, 2014 Period Danske Bank Consensus Previous 9:30 SEK Capacity utilization, industry % 4th quarter 86.9% The editors do not guarantee the accurateness of figures, hours or dates stated above For furher information, call (+45 ) Source: Bloomberg, Danske Bank Markets 7 10 February

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