• Fed sent a clear and dovish message 
• US curve steepeners keep performing
• Norwegian growth explosion amidst Swedish gloom

Read the report as pdf here.

Read our financial forecast here.

Global data outcomes have been more mixed recently, with French consumer confidence rebounding after the yellow vest-triggered collapse late last year, but US consumer confidence weakening substantially. The spread between US consumers’ expectations for the future and their view of the present situation is at extreme levels, only being wider right ahead of the US recession in 2001.

A simple probit model based on this spread suggests an almost 50% risk that the US falls into recession over the next 12 months. While this does sound ominous, we should keep in mind that the numbers may well have been temporarily depressed by the federal shutdown in the US. The government shutdown and perhaps also the “polar vortex” help provide the Fed with some extra ammunition for taking a pause in its tightening process, while also reducing the signal from incoming data near term (data will be tainted by temporary factors).

Chart 1: US consumers are thinking it can only get worse

The Fed sent a clear message in January: the central bank is in a wait-and-see mode and is even prepared to adjust balance sheet policies – an enormous shift from the hawkish stance it struck in December. Fed Watch: Clear message! If the Fed does decide to stop shrinking its balance sheet (often referred to as Quantitative Tightening), it will likely be regarded as risk-positive even though economists are likely to remain busy trying to explain to each other how QT works, or does not work, or does not matter.

Chart 2: Macro hedge funds have been leaning short – and have felt the squeeze

In the equities space, some companies, such as AMD, have seen their share prices surge despite guiding for an imminent and substantial drop in revenues. It would appear that some market participants are being squeezed out of their short positions. Incidentally, the global macro/CTA hedge fund collective have been short risky assets (and remain mildly so as of data from January 30), which may help explain why equities have been faring better, why gold prices have been rising and so on.

Chart 3: A trade war de-escalation would nonetheless likely mean bad news for the greenback

There have also been some headlines suggesting a relief on the trade front, such as one report which claims China expects Trump to cave – just as he supposedly did on the federal shutdown (at least until mid-February when a new federal shutdown may be implemented as per the latest deal), and promises by China to “substantially” expand purchases of US goods. If, however, one chooses to see the Huawei story as part of the trade war, which we think one should, FBI Directory Wray’s statement that the case “exposes brazen and persistent action (…) which threaten the free and fair global market place”, adding that the criminal offending went “all the way to the top”, the case for relief in the trade war looks less solid.

The US and China have given themselves until 1 March to come up with a new trade deal. US Treasury Secretary Mnuchin and Trade Representative Lighthizer will visit China in mid-February for more talks. If there’s any substantial progress on the trade war, meaning a de-escalation between the US and China, it will likely be further negative news for the dollar. As economic policy uncertainty tends to be good news for the dollar, less uncertainty will likely be seen as bad news.

Brexit in the front, Italo-Party in the back

If Theresa May had hoped for more clarity on her negotiation mandate after Tuesday’s series of amendment votes in the House of Commons, she must be disappointed by now. After the so-called Brady amendment passed in the House of Commons, she is once again obliged to try and re-arrange the backstop component of the withdrawal agreement. Still no one knows exactly what to put in place instead of the backstop, which is why Theresa May probably doesn’t know what to ask for, while the EU also seems unwilling to reopen the deal at all.

The passing of the Brady amendment could be seen as a proxy of the Malthouse Compromise, which consists of i) an attempt to renegotiate the backstop, ii) a managed no-deal in case that renegotiation attempt fails. This could be the exact reason why the right-wing of Theresa May’s party (Jacob Rees-Mogg and the ESG) ultimately backed the Brady amendment. This week’s developments have not moved the UK closer to a deal, rather the opposite (GBP: May to ask Brussels for a unicorn)

Also, the risk of new snap elections in Italy is on the rise, as Mateo Salvini and the League continuously fare well in opinion polls. It is now within striking distance to get a centre-right majority (League, Forza Italia and Brothers of Italy) in both the Chamber of Deputies and the Senate (according to a YouTrend simulation). On this backdrop Salvini may be pushed towards seeking a snap election by his lieutenants. Such a centre-right coalition could be even more difficult to deal with for the EU than the current League + Five Star Movement coalition and could, perhaps, become a “partner in crime” for Theresa May in her negotiations with the EU.

The EU may be battling Brexit in the front, but also have to consider Italy in the back, ahead of what will become an interesting European parliamentary election (late May).

Chart 4: Salvini’s popularity has been on the rise ever since the latest election

We still think circumstances warrant a medium-term defensive view

While the softening stance from the ECB (Draghi admitting to downside risks and saying the ECB is ready to adjust “all instruments if needed”), the Fed and the PBoC reduces the downside risks to the global business cycle, we still consider the mix of weaker growth, greater cost pressures, rising likelihood of an earnings recession amidst lofty margin expectations to be enough to still warrant a medium-term defensive view (see Nordea View).

In Scandinavia …

The Swedish krona has had a horrible start to the year, though it experienced some mild tailwinds towards the end of this week. For sure, the odd move lower in EUR/SEK at the end of last year likely paved the way for a bad starting point for those expecting the SEK to perform, but the economic surprise index plummeting to its weakest level since 2016 has not helped, and neither has robust NOK/SEK flows spilling over to EUR/SEK.

Swedish households also seem to have had a bad feeling about lots of things in January, as consumer confidence weakened substantially: Swedish Tendency Survey: Sentiment erodingThese levels of consumer confidence look more consistent with the Riksbank actually cutting rates than with hiking rates (aside from the policy mistakes of 2008 and 2011, that is). The survey responses were gathered between 1 January and 15 January, and the unpopular process of the government formation could be a temporary factor which depressed sentiment. Sweden’s PMI manufacturing was in line with expectations, but its details are becoming worse and worseSweden: PMI still weak

Chart 5: Swedish consumer confidence at easing levels

In contrast, the Norwegian krona has been doing very well. While looking at Norway’s PMI tends to annoy Norwegians who much prefer to look the regional network reports, PMI offers a stark contrast to Sweden’s PMI. Indeed, the last time Norwegian manufacturing sentiment was this lofty vs Sweden’s, NOK/SEK traded between 1.13 and 1.20. Norway’s retail sales disappointed again in December, but this does not dent the outlook for another rate hike in March as services consumption is still growing at a healthy pace. Norway: Weak retail sales

Chart 6: Norwegian retail sales was weak in December – but we don’t doubt a March hike

In fixed income …

We argued in December that maybe curve steepeners could be the next major trade on the USD curve, as the 2/10y curve typically starts to steepen when the Fed is seen as done with rate increases. The sudden weakness in US consumer confidence (admittedly potentially exacerbated by the federal shutdown) and the Fed’s dovish shift, has helped forward steepeners perform substantially. Steepeners should continue to suit as a hedge for risk assets, in our view.

Chart 7: Weaker US consumer confidence supportive of curve steepening

The EUR10y swap rate remains in a downtrend. Leading indicators will play a key role. Could PMIs recover as the ECB’s extensive list of temporary factors starts to shrink, if ever?

If the rise of the EUR in 2017 was a driver of the Euro area’s underperformance in 2018, then the stabilisation of the EUR throughout 2018 should at least translate into less headwind going forward (Swedish PMI details suggests otherwise for the Euro-area however, see below).

Chart 8: If the EUR strength of 2017 caused weak data in 2018, maybe EA PMI could stabilise in 2019?

What is most important next week?

Market participants are still awaiting a raft of delayed US data in the wake of the shutdown of the Federal government. This data include durable goods orders (plenty of near-term weakness is indicated by China PMI), retail sales growth and more. It may be released on Monday. Core inflation and Q4 GDP growth may be released during the next week as well.

Chart 9: China PMI details indicate weak US durable goods orders in coming months

With retail sales surprising in several other jurisdictions, one wonders whether nominal US retail sales will do the same, for instance in the wake of lower fuel prices and stock market turmoil (or climate angst).

Chart 10: US retail sales might disappoint in nominal terms

Euro-area retail sales growth for December will be unveiled on Tuesday, and here too it could be that the consensus is in for a disappointment. This is highly speculative, but there may be a pattern between a surge in households’ focus on climate change (fears) and somewhat lower consumption rates (temporarily).

Chart 11: Could EA retail sales disappoint too?

it might be argued that US ISM non-manufacturing is the most important number during the week. However, because the Fed is scared by global developments, out are the days when caring about US activity data (inflation data will remain important) and in are the days when we should care about Chinese statistics, the trade war, Brexit (as if we ever stopped!), and Euro-area sentiment numbers.

In Scandinavia, there’s a raft of interesting data due. Sweden offers PMI services and production data on Tuesday, followed by Mäklarstatistik’s house prices on Thursday and Swedish consumption on Friday. We have been using Swedish PMI as a canary in the coal mine for the Euro area, and the recent drop in Swedish PMI not only suggests downside risks to our estimate of Swedish business sector production in Sweden, but also further weakness in the Euro area PMIs (which thus argues against the waning of the adverse FX impulse on the EA, which was outlined above).

Chart 12: Sweden PMI manufacturing details has been a useful indicator for Euro Area PMI

Swedish house prices on Thursday are also of interest, as there have been some reports of a surge in housing supply in Sweden akin to the start of 2018. A year ago, it did not take long for house prices to undershoot their usual seasonal patterns as a result of surging supply, and some new downside pressure to Swedish house prices cannot be ruled out as spring approaches.

Chart 13: 2018 likely ended with a growth explosion in Norway

In Norway, industrial production will be published on Thursday, followed by Norwegian Q4 GDP on Friday. Growth appears to have been held back by temporary factors in the third quarter, and as these have reversed a whopping 1% qoq growth reading can’t be ruled out. Indeed, it is our forecast (Norges Bank see’s 0.7% qoq). Such an outcome will further cement the already solid case for a Norges Bank rate hike in March.

Finally, remember, Semla is not only the name of an Etruscan goddess, it’s also an excellent pastry to be enjoyed, starting in February!

Key research pieces over the past week:

FX weekly: On climate angst and fake news (27 January)

Nordea Economic Outlook: Shaky ground (28 January)

NOK forecast update: Tough Times for NOK (30 January)

Fed Watch: Clear message! (30 January)

GBP: May to ask Brussels for a unicorn (30 January)

CBR preview: The benefit of proactivity (31 January)

Euro area: Recession creeping in from the South (31 January)

China: Plunging PMI ahead of the Pig’s year (1 February)

Table 1: Main releases to watch


The week starts off slowly with few key figures in the calendar.


Tuesday is a large PMI day, as we get service and composite PMI figures from the UK, Spain, Italy, the Euro area (final), France (final), Germany (final) and ISM non-manufacturing figures from the US. Before the European markets open, the Reserve Bank of Australia holds a central bank meeting and later in the day, the Fed’s Mester (hawk, non-voter) speaks.


All eyes on the central banks, as the Polish and Brazilian central banks announce their interest rates.


Thursday’s focus is the UK as the Bank of England holds a central bank meeting and the UK’s Halifax house prices are released. The Indian and Mexican central banks also announce their interest rate decisions; the markets estimate is a 57% probability of a rate cut in India and a 35% chance of a rate hike in Mexico.


The week rounds off with Q4 GDP figures from Norway.

Week ahead – w6.pdfWACalendar-w6.pdf

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