Sweden’s economy supposedly hit a speed bump in Q1, with the estimate yesterday coming in at -0.8% QoQ vs. -0.4% expected, much of it on the drag from trade as high import energy prices weighed and exports looked relatively sluggish on upward revisions of prior numbers. But credit growth suggests domestic demand is humming along nicely, despite the most recent consumer confidence reading registering the lowest level in decades as is the case in many countries. A Bloomberg article today highlights Sweden’s commercial property sector activity in freefall after a record year in 2021 and before the Riksbank has even managed to hike rates in earnest (although the bank did achieve lift-off in April and the forward curve has seen a massive adjustment higher on the Riksbank’s dramatic reassessment of the likely policy path). Traditionally, Sweden’s economy is very pro-cyclical as it is leveraged to external demand for its products. But all of the small open economies like Sweden (and including Denmark, Australia, Canada, etc.) have seen the most aggravated of property bubbles on the many years of zero/near zero and even negative rates since the global financial crisis. On the residential side, Statistics Sweden’s average housing price indicator has risen from about 3 million just prior to the pandemic to 4 million now and up from about 2 million just after the global financial crisis. Higher yields are a massive headwind for all of these economies through the asset valuation mark-down risks. Major studies by the US Federal Reserve among others have shown that property bubbles cause enormous long-term hangovers once they pop, and Sweden’s never came close to doing so. Back in 2010-11, the Riksbank thought it could normalize and tried to do so by hiking rates to 2.0% from 0.25%, but triggered an immediate recession that saw it backtracking and cutting the policy rate to -0.5% by early 2016. Back then, the global backdrop allowed such a move, as inflation was a non-issue, particularly after the collapse in oil prices in 2015. This time around, not so much.
An interesting story out overnight flagged to me by my esteemed colleague Redmond Wong was the upward revision to 2.0% from 1.2% YoY in Japan’s March wage data, a potential game changer if similar levels or higher of wage growth are posted in coming months. The wage data series is somewhat erratic, so we can’t jump to conclusions, but it is the kind of data that would allow the BoJ to soften up its commitment to the existing yield-curve control policy. In general, the political pressure on the BoJ can only continue to mount from her if oil prices continue higher and raise the cost of living in Japan, aggravated by the weak JPY which is almost 25% weaker in REER terms from two years ago. The JPY was a touch firmer overnight after dropping in the wake of the surge in US yields. Prime Minister Kishida is set to tout a “New Capitalism” policy push that seeks to shore up inequality risks. More to come on that effort.
Table: FX Board of G10 and CNH trend evolution and strength.
Too early for this USD bounce to show up on our trend indicator, but the USD trend status looks pivotal through Friday. The commodity currencies have been trying to get something going and AUDUSD is close to last gasp resistance areas and USDCAD has been interacting with the important 200-day moving average area.