Knock On Norwegian Wood

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Includes: ENOR, NODOWD, NORW, NQNO
by: Interactive Brokers
Summary

Norway is preparing to set its course for monetary policy in the week ahead, as it contends with a recent uptick in inflation.

The Norges Bank is slated to unveil its interest rate decision, while its consumer price index (CPI) has averaged roughly 3% on a year-over-year basis over the past 12 months.

The rosy backdrop to Norway’s economic landscape appears in stark contrast to the euro area’s struggle to lift inflation.

Against this landscape, Norwegian equities appear to be lifting after a near 25% plunge from late September to December 24.

Europe: The Week Ahead (Mar 18-22)

Norway is preparing to set its course for monetary policy in the week ahead, as it contends with a recent uptick in inflation.

The Norges Bank is slated Thursday to unveil its interest rate decision, while its consumer price index (CPI) has averaged roughly 3% on a year-over-year basis over the past 12 months. The gauge in February registered 3.0%, down just slightly from 3.1% in the previous month, underscored by a monthly rise in clothing and household needs.

In its Monetary Policy Report 4/18, the central bank attributed the higher consumer prices over the past year to a “substantial increase in electricity prices.” The bank also observed that underlying inflation has also moved higher, “driven in part by a pick-up in wage growth,” which is likely to increase further due to tighter labor market conditions.

Norges Bank’s executive board elected in January to keep its policy rate unchanged at 0.75%.

The bank noted that its “outlook and the balance of risks imply a gradual increase in the policy rate.

“Global growth is a little weaker than projected, and there continues to be considerable uncertainty surrounding developments ahead.”

In Norway, economic growth and labor market developments appear to be broadly as the bank anticipated, while inflation has been slightly higher than expected.

Against this backdrop, Norwegian equities appear to be lifting after a near 25% plunge from late September to December 24. The iShares MSCI Norway ETF (BATS: ENOR) has risen more than 12% off of its latest 52-week low.

Investors have also been generally optimistic about Norway’s ability to honor its public debt obligations. Spreads on the country’s five-year credit default swaps (CDS) were recently quoted about 0.1bp tighter over the past three months to just south of 13.4bps.

Moody’s Investors Service said earlier in March that the country’s credit profile is buttressed by its “’Very High (-)’ economic strength, reflecting a large and resilient economy characterized by very high per capita income and strong competitiveness,” as well as its “‘Very High (+)’ institutional strength, reflecting very strong governance profile, effective and transparent macroeconomic framework and consensus-based policy formulation.”

Moreover, the ratings agency noted that Norway’s ’Very High (+)’ fiscal strength takes into account its “moderate debt level, very high debt affordability and the government's large sovereign wealth fund,” while maintaining "’Low’ susceptibility to event risk,” which is primarily driven by the banking sector, given “vulnerabilities arising from a heavily indebted household sector and banks' dependence on wholesale funding.”

Moody’s has assigned its pristine ‘Aaa’ rating to Norway’s government.

The rosy backdrop to Norway’s economic landscape appears in stark contrast to the euro area’s struggle to lift inflation.

The European Central Bank (ECB) has recently recommitted to combating continued muted inflation across the Eurozone, amid lower prospects for growth, with a more dovish stance on monetary policy.

The central bank lowered its expectations for annual HICP across the board due in large part to its “more subdued near-term growth outlook.” The ECB anticipates HICP inflation to come in at 1.2% in 2019, 1.5% in 2020 and 1.6% in 2021. In mid-December 2018, the ECB expected those rates to register 1.6%, 1.7% and 1.8%, respectively.

Investors will receive an update from Norway’s central bank Thursday, March 21 for more color on the country’s economic health.

Note: This material was originally published on IBKR Traders' Insight on March 13, 2019.

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