Norges Bank Review - Danske Bank

Investment Research

22 June 2017

Norges Bank Review ‘Cautiously hawkish’ – steeper FRA curve, limited NOK upside As expected, Norges Bank (NB) this morning left the sight deposit rate unchanged at 0.50%. The Board maintained the ‘neutral bias’ introduced back in September 2016, and stated that ‘the Executive Board’s current assessment of the outlook and the balance of risks suggests that the key policy rate will remain at today’s level in the period ahead’. Also, NB announced that today’s decision was ‘unanimous’, which is part of the new type of information that NB will deliver going forward. The revised rate path published in the Monetary Policy Report (MPR) removed the rate cut probability entirely, which was in line with our call. Also, NB maintained a very flat rate path signalling that no imminent rate hike is forthcoming (Chart 2). Specifically, NB maintained a positive probability of a rate hike from Q1 19 and flattened the rate path further out, highlighting that no imminent rate hikes are forthcoming. As expected, the positive effects on the rate path from stronger domestic growth and a weaker currency more than mitigated the negative effects of lower global rates and lower inflation. In addition, according to NB, the uncertainty surrounding the effects of changes in interest rates when rates are close to zero calls for a more careful approach. In isolation, this pulled the rate path downwards. Without this factor, the rate path would have indicated roughly a 50% probability of a rate hike in the second half of 2017. Whereas NB adjusted the forecast for mainland GDP and hence the output gap upwards for 2017, the forecasts for 2018 and 2019 were adjusted downward slightly. Taking our own estimates into account, we expect the output gap to be closing roughly one year earlier than forecast by NB. This view is strongly supported by the capacity constraints in the Regional Survey (Chart 10). A simple Taylor rate approach suggests the timing of the first hike will move forward more or less correspondingly. Based on this, we now expect NB to hike rates towards the end of 2018.

Chart 1: NB kept rates unchanged and repeated neutral stance in statement

Source: NB, Macrobond Financial, Danske Bank

Chart 2. Rate path cut probability removed. Probability of rate hike kept unchanged at Q1’19.


Chart 3: “Prices and Wages” (grey) countering positive factors in front Contributing factors for NB rate path changes

pp 0.60 0.40

FI/Rates. We reiterate our strategy of selling NOK FRA 3M Jun 2018 and buying NOK FRA 3M JUN 2019. The strategy was opened at a spread of 22bp. Just ahead of the NB meeting the spread had decreased to 20bps. The FRA curve steepened marginally on NB’s slight hawkishness. However, by combining the removal of the drop in the interest rate path in 2018 with a flatter curve from Q1 19 to Q2 20 (due to international forward interest rates), this worked against our strategy. The current spread is 21bp. Tomorrow, at 12:00 CET, the Gjedrem Committee’s report is due to be released. The Minister of Finance, Siv Jensen, will be present at the press conference. There is a risk that this event will be used by the MoF to present an adjustment to the inflation target. If there is news in this respect, the inflation target may be lowered towards that of peers. This should steepen the FRA curve, i.e. support our current JUN18 JUN 19 strategy. FX. EUR/NOK has as expected fallen slightly on the announcement, with the downside limited by the flatness of the rate path. Going forward, we emphasise that the global environment remains a headwind for the NOK; hence, we do not see this as a trigger for a sustained EUR/NOK trend lower – not least, the near-term oil price outlook seems challenging with markets focusing increasingly on weak demand amid OPEC losing its market influence (key for our cautious stance from start March). We are strategically bullish on constructive domestics but remain tactically cautious on global demand and the oil price outlook. Hence, we prefer to position for a lower EUR/NOK via options.

Important disclosures and certifications are contained from page 5 of this report.

0.20 0.00 -0.20 -0.40 -0.60 Q3'17Q4'17Q1'18Q2'18Q3'18Q4'18Q1'19Q2'19Q3'19Q4'19Q1'20Q2'20Q3'20Q4'20

Domestic demand

Foreign factors

Prices and wages

Exchange rate

Financial imbalances and uncertainty

Money market spread

Total


Chief Economist Frank Jullum +47 45 25 85 29 [email protected] Chief Strategist Jostein Tvedt +47 23 13 91 84 [email protected] Senior Analyst Kristoffer Kjær Lomholt +45 45 25 85 29 [email protected]

www.danskeresearch.com

Norges Bank Review

Appendix chart pack Chart 4: Rate path cut probability removed. Probability of rate hike kept unchanged at Q1 19. Long-end lowered slightly.

Chart 5: ‘Prices and Wages’ (grey) countering positive factors in the front, not least from demand and NOK Contributing factors for NB rate path changes

pp 0.60 0.40 0.20 0.00 -0.20 -0.40 -0.60

Q3'17Q4'17Q1'18Q2'18Q3'18Q4'18Q1'19Q2'19Q3'19Q4'19Q1'20Q2'20Q3'20Q4'20

Domestic demand

Foreign factors

Prices and wages

Exchange rate

Financial imbalances and uncertainty

Money market spread

Total

Source: Norges Bank, Macrobond Financial, Danske Bank Markets


Table 1: Contributing factors for changes to the rate path

Quarter

Domestic demand

Foreign factors

Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 Q3'19 Q4'19 Q1'20 Q2'20 Q3'20 Q4'20

0.25 0.20 0.10 0.03 0.01 0.03 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

-0.01 -0.02 -0.02 -0.03 -0.04 -0.05 -0.06 -0.07 -0.09 -0.09 -0.10 -0.11 -0.12 -0.13

Contributing factors for rate path changes (pp) Prices and Exchange Financial imbalances and wages rate uncertainty -0.36 -0.26 -0.17 -0.11 -0.06 -0.02 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.26 0.26 0.28 0.27 0.25 0.21 0.14 0.10 0.09 0.09 0.04 0.01 0.01 0.01

-0.07 -0.10 -0.11 -0.07 -0.06 -0.07 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Money market spread

Total

0.03 0.03 0.01 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.10 0.10 0.10 0.10 0.10 0.10 0.08 0.03 0.00 0.00 -0.06 -0.09 -0.11 -0.12

Source: Norges Bank, Danske Bank Markets

Chart 6: Mainland GDP forecasts raised in 2017, lowered slightly for 2018 and 2019

Chart 7: Petroleum investment projections were raised for 2017 but lowered slightly for 2018

Source: Macrobond Financial, Bloomberg, Danske Bank Markets


2 | 12 December 2016


Norges Bank Review

Chart 8: Household consumption projections raised

Chart 9: Public demand raised for 2018 and 2019



Chart 10: Output Gap projection lifted as expected

Chart 11: Core inflation projections (quarterly) “twisted”

Source: Ministry of Finance, Macrobond Financial, Bloomberg, Danske Bank Markets

Source: SSB, Macrobond Financial, Bloomberg, Danske Bank Markets

Chart 12: Core inflation (annual)

Chart 13: Wage growth projections kept roughly unchanged





Norges Bank Review

Chart 14: NB raised the I44 forecast…

Chart 15: …yet still pencil in limited NOK strength



Chart 16: EUR/NOK has as expected fallen slightly on the announcement. Downside limited by flat rate path, oil prices.

Chart 17: We reiterate our strategy of selling NOK FRA 3M Jun 2018 and buying NOK FRA 3M JUN 2019





Norges Bank Review

Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’). The authors of this research report are Frank Jullum, Chief Economist, Jostein Tvedt, Chief Strategist, and Kristoffer Kjær Lomholt, Senior Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in this research report accurately reflect the research analyst’s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request. Danske Bank’s research reports are prepared in accordance with the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high-quality research based on research objectivity and independence. These procedures are documented in Danske Bank’s research policies. Employees within Danske Bank’s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank’s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors on request. Risk warning Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis of relevant assumptions, are stated throughout the text. Date of first publication See the front page of this research report for the date of first publication.

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Report completed: 22 June 2017 at 10:38 GMT Report disseminated: 22 June at 11:00 GMT

