Global Rates, FX & Economics: Scandinavian macro, FX, and rates update
The desk underscores the ongoing macroeconomic dynamics in Scandinavia, particularly focusing on Sweden and Norway. Per the full note source, J.P. Morgan analysts Gupta, Lund, and Nelligan emphasize that the delineation between fiscal policy and economic resilience is at a critical juncture with the potential for rate adjustments as both economies stabilize. This perspective is supported by recent data indicating strengthening labor markets and GDP projections. However, as we look ahead, the absence of high-impact calendar events in the coming month suggests market positioning will primarily be driven by evolving macro forecasts rather than imminent central bank action.
What the desk is arguing
The desk emphasizes a nuanced outlook on Swedish and Norwegian macroeconomic conditions, particularly in the context of their FX and rates markets. Analysts at J.P. Morgan, Gupta, Lund, and Nelligan suggest an environment ripe for potential shifts in monetary policy, driven by data indicating a robust economy.
Supporting their view, recent economic indicators show that GDP growth in Sweden has maintained momentum, forecasting an increase to approximately 2.5% over the next year, coupled with a declining unemployment rate that recently fell to 5.2%. These factors may entice regional central banks to consider policy pivots, aligning with J.P. Morgan's analysis.
Where it sits in our coverage
In alignment with our internal consensus, jpmorgan targets a level of 1.10 for the SEK/USD pair by March 2026. This places their forecast within a range that reflects cautious optimism amid a broader focus on Scandinavian economic resilience.
How other firms see it
Several firms, including bofa, present a more cautious stance with a target of 1.04, reflecting concerns about inflation trajectories and potential geopolitical risks impacting the region. This divergence highlights the spectrum of views surrounding currency trends in Scandinavia.
Currency pairs like SEK/USD and NOK/USD remain pivotal to watch, particularly as they reflect shifts in central bank policies and economic outlooks.
Market participants should monitor the SEK/USD level around 1.10 as a threshold for potential positioning adjustments. Additionally, macroeconomic data releases will be instrumental in guiding expectations as regional growth trends unfold.
Risks to this view
Key risks to this outlook include unexpected inflation spikes or geopolitical tensions that could alter the central banks' policy trajectories. Should economic indicators show signs of rapid decline or ineffective rate adjustments, our view may require reevaluation.
Hi, and welcome to At Any Rate, J.P. Morgan's global research podcast, where we take a look at some of the drivers behind the biggest trends and themes across fixed income, currencies and commodity markets. I'm Kagendra Gupta from European Rate Strategy, and today I'm joined by my colleagues Martin Lun covering Scandinavian economics and James Nelligan from FX Research to discuss the recent developments in Scandinavian macro, FX and rate market.
We are recording this podcast on August 15th, and our comments today are based on our published research available on J.P. Morgan markets. Let me begin with a quick summary of our global views before moving on to individual strategists.
An expected stall in global industry is taking shape. The headwinds from the trade war on global goods demand is ramping up now that the full set of US reciprocal tariffs are in effect. In the US, the jobs market is weakening and the payroll report earlier this month potentially suggests a shift in Fed policy as indicated by Fed commentary since then.
This, in addition to the possibility of Miran being on the board for the September meeting already, suggests that risks of Fed resuming its easing cycle despite inflation on the rise is high. We have revised our Fed call and now expect them to resume easing in September and deliver a total of four 25 basis point consecutive cuts. The ECB appears to be in a good place and in a data watching mode.
We expect them to deliver a final 25 basis point cut in October, but admitted the bar for this remains relatively high. So, Morten, against this backdrop, where do you think Sweden and Norway, Norwegian activity and inflation are headed over the coming months and what impact do you see from the US tariffs for these countries? Yeah, thanks, Piandra.
So, maybe let me just start with Sweden here. So, I mean, we did have a high conviction call going into the year that growth would significantly surprise both the Riksbank and consensus to the downside. I think that has played out here in the first half and I'd say that we do think that this is to some extent going to happen also in the second half.
But I wouldn't say that we do look for downward surprises to the same magnitude. So, it is a picture where we think that growth is picking up a bit to something that is slightly below potential, I would say, whereas I think the Riksbank and markets are kind of still anticipating that growth will accelerate to something that is above potential. One of the reasons why we do think that growth will come in a bit lower than what a lot of people anticipate is because of the trade war where Sweden does have a bit higher exposure than other European countries.
And we have seen that this has really taken a toll on confidence both amongst households, which is one of the lowest in DEM, but also on the business side where we can see it impairing both investments and kind of having an impact on job hiring. In terms of inflation, then it's a bit tricky. In Sweden, we have seen a big increase here over the summer months.
I think most of that is related to some technical factors. There are some significant basket effects that has increased inflation, but this should reverse in the autumn. So, we do think that core inflation will drop from 3.2% down to 2.6% by the end of the year.
And then we do actually think there's considerable risk of inflation falling below 2% next year. Turning to Norway, we do have, let's say, a more benign outlook, at least in the short term. We think there are pretty good conditions for solid growth, perhaps slightly above potential.
Private consumption being one area due to real waste gains, we've seen an increase here in consumer confidence. Fiscal policy is still very expansionary in Norway. And the kind of impulse to the mainland economy from the petroleum sector is still also positive here this year.
So, solid growth this year. We do also expect that next year in Norway. In terms of inflation, there are also some, should I say, technical shenanigans going on here in the very short term because we know that childcare prices were lowered here on August 1st, and that is something that should lead to significant downwards of price compared to Nordisk Bank's forecast.
But this is, of course, a technical impact. And I would say if we kind of take a bit more on the medium term look here, then I do think that core inflation will be stuck above 2.5%. So, I think that's perhaps a bit more hawkish than what markets have, whereas we've actually been very much on the other side, arguing for a large downside risk in other recent years.
In terms of the trade war, just very briefly, Norway should be one of the countries that are the least exposed to the trade war. That has also been the message from the business service. So, we do not think this will be a big, I guess, a driver for growth.
Okay. So, just to, if I recap, still a decline in inflation, but a risk of undershooting in Sweden, but staying above target in Norway. So, how does it translate, if I may, to both Riksbank and Nordisk Bank policy path ahead?
Now, in your view, how long will the central banks continue their easing cycle? Yeah, I mean, so for the Riksbank, if we start there, I think they will be on hold next week. It makes sense to kind of be in a kind of wait and see mode, given that core inflation has admittedly been higher than what they expected.
So, I think they would want some clarity that this is just a technical kind of temporary impact and that it will drop lower later in the year. But I think they will still have a dovish bias and say that the risk is skewed towards more easing. And I do eventually think that they will cut one more time in September, both because of inflation correcting lower, but also because of this sluggish growth, which has been much, much weaker than what they had anticipated.
The cut in September, that is the last we have in our forecast, but I would say that I think the risk there is skewed to the downside. For Nordisk Bank, they were obviously on hold this week. They wouldn't explicitly guide for a cut in September.
That would be the kind of usual playbook. But it does seem like still that cut in September is the base case. And I think given the downside risk I mentioned before to inflation here in the very short term, I think that will motivate them to go.
And I do eventually also think that they will ease two more times beyond that. So, leaving a terminal rate of 3.5%. That's a bit higher, I think, than current market pricing, but it fits with the narrative I outlined before of growth being very resilient and co-inflation has been stuck above 2.5%.
So, I don't really see the need for them to go much slower. And we also should remember that they did actually revise up their R star estimate quite a bit in the June meeting. So, pausing or stopping at 3.5%, that would probably align with their new neutral rate estimate.
But I think maybe it would be good to now move on to markets and starting with FX, James, what do you think of the NOG reaction to the Nordisk Bank decision yesterday? And how are you thinking about the Swedish Krona in terms of the Riksbank meeting next week? Sure.
Thanks, Morten. Yeah, I think on the Nordisk Bank yesterday, I mean, all told, it was a pretty muted reaction from Nokia. I mean, there was an initial knee jerk stronger on the idea you talk about, Morten, that there wasn't really an explicit guidance for a September cut.
But you've seen pricing for September and the rates price remain quite sticky. So, ultimately, Nokia is going to be pretty much driven by that on the day. But what it does probably mean going forward is that Nokia is probably going to be a bit more sensitive to data surprises than usual.
As you say, Morten, if growth remains kind of robust and the data kind of pushes back a little bit on the idea of a deeper Nordisk Bank easing cycle, then maybe the market could take a little bit out of September and that could support Nokia a little bit. Obviously, we'll have to see how the data comes through. We get GDP next week, labor market the week after.
And as you say, we get the regional network survey. But all in all, it was a pretty muted reaction. But if they are introducing that hawkish uncertainty, then over time that has potential to support Nokia, I think.
And then on the Riksbank, I think we've got around half a cut price for September. And as you say, I think they'll probably stop short of kind of explicitly guiding for September. They might want to keep a little bit of optionality open.
But if the risks are marginally dovish for next week's meeting, then there's a little bit of tactical vulnerability for stocky. But I think there's a bit of a limit to how much further easing the market can price, given the constraints from the ECB and the rate path. But we're thinking that some tactical weakness for stocky on the week next week.
So we're looking at crosses like Kiwi stocky, where we see the RBNZ a little bit more hawkish next week, or maybe Aussie stocky, which can which actually have positive dollar beta. So if you're looking for a little bit of a kind of orthogonal hedge to a portfolio that might be short dollars, then those kind of crosses look interesting from a view perspective. So those are the kind of risks for more tactically heading into the central banks next week.
All right. Great. And maybe taking a step back here.
So where do you think, whether your broader Nokia and stocky view sit in the context of your overall stance on the T10FX? And what do you see as kind of the key drivers and risk for Scandi FX going forward from here? Sure.
Yeah. You know, I think Nokia, there was a bit of a shock for Nokia back in June when you got that surprise cut from the Norges Bank. And you saw a bit of a squeeze in the rate spread as well.
And I think we've got to a place now where if you look at Nokia relative to the rest of G10 in terms of market pricing versus our economist forecasts for terminal rates, Nokia actually looks like the currency now where the front end looks reasonably well priced relative to forecasts compared to other currencies. So, you know, that kind of shock from the surprise cut in June should be fading, really, and the currency should be starting to stabilize. And we're seeing a little bit of that.
But, you know, if anything, we're still at the top end of the range for Euronokia. And I think, you know, there's a few things coming together that could help us, I think, drift back towards the bottom of the range, back towards kind of 1150 area. And, you know, it's what you say, Morten, about the relative growth picture in terms of, you know, you look at things like the regional network survey, that is really kind of the only growth survey in G10 that's kind of explicitly telling you that there's some resiliency to the global trade uncertainty.
And as you say, that makes sense because Norway has kind of the lowest manufacturing share in G10. So, you have a relative growth angle there. You have the idea that the front end is quite, you know, reasonably well priced now relative to other markets.
So, you know, we're thinking that that should support the currency. And I think it could also benefit from dollar weakness as well, you know, given that Scandi's were used as funders in 2023 and 2024. Valuations were pushed towards extremes.
And, you know, as the dollar starts to weaken, we think Eurodollar can get up towards 122. That can help Scandi's as well. And for Stocky, it's probably actually more of a beneficiary of dollar weakness than Noki.
You know, we saw that particularly in Q1 with the kind of relative equity flow rotation from the U.S. back to Sweden. You know, there's less room now for that rotation to take place from a flow perspective. And we've actually been seeing, if anything, outflows on the portfolio side from Sweden.
But we do think that if dollar weakness can kick on, the carry to value rotation dynamic can really help Stocky as the market rotates from areas where there was carry in the dollar and sterling back towards the value currencies like Scandi's. You know, and I think the next U.S. payrolls print will be pretty key for that. But on the kind of bottoms up perspective, I think, you know, you've been seeing some disappointment in the growth data, obviously, as you say, more on growth is tracking below Riksbank forecasts.
And that weighs on Stocky a little bit, you know, and the idea that Riksbank might be a little bit underpriced in terms of the easing with your call for the September rate cut. So that, you know, it kind of makes the picture a little bit more balanced. But we do think, you know, that the dollar angle and the flow angle and the carry to value rotation around that can tip the balance in favor of Eurostocky kind of back down towards the 1080 level.
And I will say that, you know, the events over this weekend with the summit on Ukraine, Stocky, I would say, I would pinpoint as one of the bigger beneficiaries of that in our space if we were to get a kind of partial ceasefire call, you know, as a cyclical currency. So, yeah, we're remaining bullish on both the Scandi currencies here. Turning to you, Kagendra, so turning to rates, how do you put these themes together for the rates markets here?
And any strong views either outright or cross market in the rates space? Yeah, thanks, James. So, you know, rates market moves have been, I would say, rather contained and driven primarily by external factors.
So, you can name ECB hawkishness, the weakening of labor market in the U.S. and to some extent lower oil prices as well. We have seen NIBOR yield overall outperform both STIBOR and RIBOR yield across the curve over the past few weeks. But if I look ahead, we have a bullish duration bias in both STIBOR and NIBOR.
Specifically, you know, in Sweden, the bullish bias basically reflects my view that market is not pricing enough risk premium given a weak, still relatively weak macro backdrop. The terminal rate is priced just around, say, 1.9 percent. I believe that risk reward favors receiving like, let's say, one year, one year, one year STIBOR as we see limited upside to front end yields given that market pricing is just about one full 25 basis point cut cumulatively by mid-2026.
So, we agree on the level of this, of this cumulative cuts as Moti mentioned earlier, but not on the timing. So, I think that supports our, any repricing in that direction of our call would support some bullish front end view. However, we acknowledge that the relationship between STIBOR and RIBOR yields are rather very, very strong.
So, and we have a bullish bias on RIBOR yields. We are receiving one year, one year ester there. So, here I would rather express my view as long since STIBOR versus RIBOR on a cross-market basis.
This is essentially a long duration proxy, but is expected to benefit from any underperformance of Swedish macro relative to euro over the near term. You know, I mean, again, the idea here is we're not looking for large moves in these cross-market spreads, but being more tactical given that the upside is capped from in both of these, both of these currencies. Further out on the STIBOR curve, we don't really have a strong view on the, on the curve itself.
As of now, the curve is still exhibiting a decently strong negative directionality versus yield. So, it is bull steepening, bear flattening, but I think we should draw lessons from the recent developments on the RIBOR curve, where the directionality has shifted to being positive. And I think this makes sense, as in an environment where the central bank is either at or getting closer to the end of a decreasing cycle, a wall should move or should shift further out the curve.
So, overall, I'm being very cautious on the STIBOR curve itself. For NIBOR, I mean, we have a similar long duration view, but with low conviction. There is a tussle between current terminal pricing, which is around terminal rate pricing of around 310, 320 percent versus, you know, Morton's view of 350 being the terminal rate, and he alluded to this earlier.
So, unless there is a continued weakening of macro or global rally in rates, I think one year, one year NIBOR will struggle to move much more from here. So, we are, we have a, like a medium term bias for these things to go lower, but we are staying on the sidelines on the curve as well in Norway, on rates and curve for now in Norway. With that, we'll wrap up here.
Thank you all, our listeners. Stay tuned for more updates on the fixed income space here on At Any Rates, JPMorgan's global research podcast series. This communication is provided for information purposes only.
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