Our SEK calls remain mostly intact from our 2020 outlook, with just a minor upwards revision to USDSEK to account for the deteriorating global growth outlook.
However, our adjustment for a weaker krona is lower than our euro adjustment, ultimately leading to a downwards revision in EURSEK.
Overall, we remain bullish on the Swedish krona in the long-term due to improving domestic economic conditions, a likely uptick in eurozone and global economic activity, and our view that the threshold to further monetary easing is high.
However, inflation pressures and a slowing global economy remain a risk going forward.
The KI/NIER Economic Tendency Indicator, a key survey measure of expectations in Sweden, rose by 3.6 points to 97.1 in January. While the reading still sits below the key 100 break-even level, it points to a potential rebound in sentiment after the broad decline in the indicator since September 2018.
The positive surprise was predominantly driven by the manufacturing sector, with retail sales and construction also adding positively to the aggregate reading.
However, consumer confidence and private-sector services continue to weigh on the composite number. With non-manual workers’ wages growing at a stable rate above inflation measures, household lending stable at 5% and retail sales data defying expectations of a slowdown, an improvement in consumer confidence may be on the horizon.
Chart: Both the KI/NIER Economic Tendency Indicator and the January PMIs point to a rebound in economic activity in Q1.
The PMIs paint a similar narrative. The January composite reading of 52.5 was the highest print since August, with most of the positive momentum stemming from the service sector – the services PMI rose by 3.4 points to 52.5. Behind the headline figures, sub-indices also rose while the details around employment look resilient.
The strong survey data suggests economic activity is set for a strong recovery in Q1. The Goldman Sachs Current Activity Indicator (CAI) suggests given the latest data that Sweden’s economy is set to grow by 1.1% in the first quarter.
The resurgence in growth, however short-term thus far, is likely to keep voting member Breman on side with the current plan for a 0% interest rate. Breman previously voted against the December rate hike due to weak economic activity.
INFLATION REMAINS A PROBLEM
Despite the Riksbank deciding to return rates to 0% in December, voting member Per Jansson opted against such a policy due to inflation remaining below target.
The CPIF figure fell a further 5 percentage points below December’s reading of 1.7%, which in itself only held stable due to rounding.
The latest inflation data for January supports Jansson’s concerns.
The negative surprise in the data suggests the rebound in inflation the Riksbank hoped to achieve with negative rates may not be as structural as previously believed.
Although a large part of the inflationary undershoot was driven by energy prices, and more specifically lower electricity prices due to a windier than usual January, the narrative of softer than expected inflation remains more prevalent than ever.
In December, headline CPIF was only propped up by higher transport prices, specifically the rising cost of international flights, while housing costs and food products dragged significantly.
Despite January’s data being a write-off due to transitory impacts and the re-adjusting of the composition of the CPI basket, its impact on inflation expectations remains a concern. However, the Riksbank has some wiggle rooms. A recent staff memo outlined that Statistics Sweden adjusted price data more aggressively than European counterparts when compared to PPP measures, suggesting the inflation readings consistently underscore the true inflation reading.
This, in our view, makes the threshold high for rates to return to negative territory despite all 6 voting members voicing their support for lower rates if necessary.
GROWTH TO IMPROVE BUT SEK RALLY WILL BE MILD
In summary, while we expect macro conditions to improve in Sweden, this is conditional on certain support mechanisms remaining in place. One of them is the expansion of the Riskbank’s balance sheet, which has kept SGB’s suppressed, while the other is a weak krona against its major trading partner – the euro.
Global macro conditions also support a weaker krona in historical terms in Q1.
The deterioration in risk sentiment due to the coronavirus has impacted the performance of currencies with open economies.
With inflation threatening to grind lower, economic activity showing early signs of recovery, and the prospect of a growth shock to the global economy, we believe EURSEK will continue to trade around 10.4 in Q1, with USDSEK trading around 9.5.