Scandi Markets: Inflation Takes Centre Stage
Danske Markets | Aug 11, 2014 03:25AM ET
In Sweden, the week ahead will be all about inflation as Statistics Sweden releases July CPI data (Tuesday, 09:30 CET). Our assessment is that July inflation fell to the Riksbank's forecast again, i.e. CPIF and CPI landed at 0.4% y/y and -0.1% y/y respectively. Risk is probably marginally tilted to the upside. But any deviations should not be enough to affect either the Riksbank or market interest rates.
Inflation figures (Monday, 10.00 CET) for July will be the most important data from Norway this week. Annual price growth in July will be pulled lower by this year's Agricultural Agreement, which was much more modest for farmers than last year's (base effect). We thus estimate that core inflation fell to 1.9% y/y in July from 2.4% in June. This is significantly lower than what Norges Bank projected in its Monetary Policy Report 2/14 (2.15%) and it will be the 2nd month in a row with actual core inflation below the Norges Bank forecast. Risk is in fact seen to the downside.
Despite the lower inflation outcome we do not believe that Norges Bank will cut rates as the economy has improved over the summer. If the inflation comes out in line with our expectations we would therefore recommend to pay NOK 1y swap 6m forward, as we believe the market is pricing in a too high probability of a rate cut over the next 18 months. As an alternative one could consider to pay MAR15 3M FRA. Both strategies has a small positive roll. In the FX market we prefer to be long the Norwegian krone against the Swedish krona. We forecast that the NOK/SEK will hit 1.12 over the next month.
Inflation figures for July are the main event in Denmark next week. We expect a readout of -0.3% m/m for July compared with 0.0% for June, with the annual inflation rate at 0.5% y/y for July versus 0.5% for June. In this edition we also take a closer look at the drivers for the EUR/DKK.
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