FX - The Week Ahead: A still hawkish Norges Bank may not be enough to lift NOK as Trump 2.0 weighs on sentiment towards Europe

Norges Bank remains stubbornly hawkish with easing likely delayed to 1Q25

• NOK: The Norges Bank left its policy rate unchanged at a 14-year high of 4.50% at Friday’s interim meeting (no new Monetary Policy Report), as widely expected. The press statement still committed to the policy rate staying at current levels until the end of 2024, as it did in September, and to start easing policy only gradually from 1Q-25. This was more hawkish than Citi Research’s expectation of a hint to a possible rate cut in December.
   
• NOK: Despite acknowledging the weakness of Norway’s economy, slightly higher unemployment and lower than expected inflation, the press statement highlighted ongoing FX weakness and higher policy rate expectations abroad (mainly in the US) as the main reasons to continue keeping policy tight. On the other hand, the statement noted the recent recovery in housing demand (not supply) as well as slightly higher public spending in 2025 than in 2024 embedded in the new budgetary plans as positive developments. Overall, the assessment was that the outlook for the Norwegian economy “does not appear to have changed materially since the previous monetary policy meeting”.
   
• NOK: It is clear that krone weakness remains Norges Bank’s key concern preventing monetary tightening to be dialed back. Citi Research believes a weaker krone does not offset the restrictiveness of financial conditions and the impact on the inflation outlook, which Citi Research expect to ease further into 2025. Yet, the fact that realized inflation is still at 3%, albeit falling fast now, and that wage growth remains elevated, explains the significantly different monetary policy stance compared to Sweden.

Riksbank steps up easing pace, expected to cut to neutral rate by 1Q25

• SEK: Sweden’s Riksbank cut rates by 50bps in its policy meeting last Thursday, bringing policy rates to 2.75%, in line with market expectations. The statement highlighted that "to further support economic activity, the policy rate needs to be cut somewhat faster than was assessed in September". They signaled that the policy rate may be cut again in December and in H1 2025, if the outlook for inflation and economic activity remains unchanged. However, no new forecasts were released in the report.
   
• SEK: Sweden’s inflation has fallen much faster than elsewhere, helped by a widening output gap, rising unemployment and more contained wage growth. Targeted CPIF is now close to 1% and expected to stay below 2% until 4Q-25 (according to Citi Research and Riksbank forecasts). Meanwhile, inflation expectations have declined below 2% over the nearer-term horizons, while still at 2.0% 5-year ahead and the labor market continues to weaken.
   
• SEK: Therefore, while private consumption has rebounded recently, overall economic activity remains stuck in a mild recession (GDP declined again in 3Q) and after two years of below-trend GDP dynamics, unemployment keeps rising leading to economic sentiment surprisingly declining again in October, against hopes for a near-term turnaround. Following the 50bp cut in November, Citi Research expect cuts of 25bp in December and an additional 100bp in 2025 and maintain their view of a terminal rate below 2% (1.75% if not lower), below Riksbank’s latest forecast of 2.25%.

Week Ahead:

US – Presidential and congressional elections and FOMC meeting in focus this week

• USD: US October CPI MoM – Citi: 0.2%, median: 0.2%, prior: 0.2%; CPI YoY – Citi: 2.6%, median: 2.5%, prior: 2.4%; CPI ex Food, Energy MoM – Citi: 0.3%, median: 0.3%, prior: 0.3%; CPI ex Food, Energy YoY – Citi: 3.3%, median: 3.3%, prior: 3.3% - Citi Research expect core CPI inflation to rise 0.3%MoM for the third consecutive month, but by a modestly softer 0.26% and with details that should not be concerning for a continued easing in inflation. But given some upside risks from components of PPI data (see below), this would translate to a 0.24%MoM increase in core PCE inflation. Most importantly, shelter inflation is unlikely to continue slowing over the coming months, even if the month-to-month path of this slowing is bumpy. In October, Citi Research pencil in a 0.25%MoM increase in primary rents and a 0.30% increase in owners’ equivalent rent. Headline CPI should rise a more modest 0.2%MoM due to falling energy prices, but with base effects, implying a pick-up to 2.6%YoY.
   
• USD: US October PPI Final Demand MoM – Citi: 0.2%, median: 0.2%, prior: 0.0%; PPI Final Demand YoY – Citi: 2.3%, median: 2.3%, prior: 1.8%; PPI ex Food, Energy MoM – Citi: 0.2%, median: 0.3%, prior: 0.2%; PPI ex Food, Energy YoY – Citi: 3.0%, median: 3.0%, prior: 2.8%; PPI ex Food, Energy, Trade MoM – Citi: 0.3%, median: NA, prior: 0.1%; PPI ex Food, Energy, Trade YoY – Citi: 3.3%, median: NA, prior: 3.2% - Citi Research expect a modestly stronger increase in producer prices in October after a softer month in September, with total PPI final demand rising 0.2%MoM and core PPI that excludes food, energy, and trade services rising 0.3% with modest upside risk to this estimate. Overall however, Citi Research continue to see the trend of PPI data as easing in line with softening demand, falling energy prices, and easing supply disruptions.
   
• USD: US October Industrial Production – Citi: -0.7%, median: -0.2%, prior: -0.3%; Manufacturing Production – Citi: -1.1%, median: -0.3%, prior: -0.4%; Capacity Utilization – Citi: 76.8%, median: 77.3%, prior: 77.5% - Citi Research expect a 0.7%MoM decline in industrial production in October, with a larger 1.1% decline in the largest subset of manufacturing production. There was a roughly 0.3pp drag on production in September from a strike of aircraft manufacturers that lasted through half of the month. As the strike continued through the whole month of October, there should be at least a similarly sized drag on production in October with possibly more drag from knock-on impacts in related sectors the longer the strike lasts. However, production should rebound post-strike in November though more broadly, manufacturing activity has been weakening for some time and a further pullback is likely in production for goods such as autos.
   
• USD: US October Retail Sales – Citi: 0.0%, median: 0.3%, prior: 0.4%; Retail Sales ex Auto – Citi: -0.3%, median: 0.3%, prior: 0.5%; Retail Sales ex Auto, Gas – Citi: -0.1%, median: 0.3%, prior: 0.7%; Retail Sales Control Group – Citi: 0.0%, median: 0.3%, prior: 0.7% - retail sales were stronger than expected in September. Part of the strength though could have been due to temporary factors such as stocking up ahead of the hurricanes with grocery store sales increasing at a strong pace. Citi Research expect more modest readings in October and generally expect a softer retail sales print with total retail sales flat on the month. Meanwhile, control group sales are also likely to be flat with spending in most categories falling on the month. Citi Research continue to expect a weaker labor market in the coming months, which would weigh on consumption.

Europe and UK – German and euro area ZEW, UK Q3 GDP and payrolls data in focus this week

• EUR: German and euro area ZEW — following Donald Trump’s surprise election victory in November 2016, ZEW investor expectations for Germany and the euro area improved further into positive territory, with the current assessment positive around +60%. This time around the mood may be less positive due to tariff and security threats, although a current assessment at -87% should put a floor underneath expectations. German ZEW Investor Expectations, November – Citi Forecast 5.0, Consensus 12.5, Prior 13.1 (Trump effect); ZEW Current Assessment, November – Citi Forecast -87.0, Consensus -86.0, Prior -86.9; Euro Area ZEW Expectations, November – Citi Forecast 16.0, Prior 20.1.
   
• GBP: UK consumer led recovery still not building momentum — Q3 GDP is likely to have grown by 0.2% QQ in Q3 and 0.2% in September. There are some modest downside risks. But the focus will be around the data on the consumer, and whether with the latest release there are any early signs of improving momentum into the end of the year. Nonetheless, overall momentum will likely remain subdued. UK Quarterly GDP, Q3 – Citi Forecast 0.2% QQ, Consensus 0.2%, Prior 0.5% (BoE: 0.2%).
   
• GBP: UK October private payrolls —focus will also be on the UK labor market data, which will likely show vacancies continuing to fall back, and the PAYE data also continuing to fall. The weakness of the LFS data means the headline employment and unemployment indices will remain discounted. Instead, markets are likely to be more focused on the – (1) claimant count, and (2) workforce jobs data, both of which will likely indicate continued moderation: Vacancies, Aug-Oct – Citi Forecast 829k, Prior 841k (converging on pre-Covid levels); Pay rolled Employees (MM Change), October – Citi Forecast -25k, Consensus -11k, Prior -15k; LFS Unemployment, Jul-Sep – Citi Forecast 4.1%, Consensus 4.1%, Prior 4.0% (three-month average roll); LFS Employment Change (3M/3M), Jul-Sep – Citi Forecast 285k, Consensus 290k, Prior 373k; Average Weekly Earnings, Jul-Sep – Citi Forecast 4.0% 3M YY, Consensus 3.9% 3M YY, Prior 3.8% 3M YY; AWE Ex Bonus, Jul-Sep – Citi Forecast 4.7% 3M YY, Consensus 4.7% 3M YY, Prior 4.9% 3M YY (private sector regular pay 4.7%. BoE: 4.8%).

Japan – Real Q3 (flash) GDP in focus this week

• JPY: Real GDP 1st Preliminary Estimate (3Q): Forecast: 0.2% SA QoQ; 0.9% SAAR, Previous: 0.7% SA QoQ; 2.9% SAAR – Citi Research estimate that real GDP increased 0.2% QoQ and 0.9% QoQ annualized in the third quarter. A fixed-amount personal tax cut as well as wage hikes likely boosted consumer spending, but unfavorable weather/disasters in August probably kept consumption growth modest. While Citi Research expect a pickup in economic growth in the fourth quarter, markets need to watch for downside risks as rising inflation continues to weigh on consumer sentiment.

Commodity Bloc – Australia’s jobs and wages data in focus this week

• AUD: Australia Q4 Wage Price Index: Citi QoQ forecast; 0.9%, Previous; 0.8%; Citi YoY forecast; 3.6%, Previous; 4.1% - quarterly wages are expected to accelerate in Q3 thanks to the increase in minimum and award wages that kicked in starting July. The Fair Work Commission’s decision applies to around 20% of the workforce that is on award wages, and these are mostly private sector workers. However, enterprise bargaining agreements, of which around two-third are public sector, have also increased recently. Thus, the acceleration in quarterly wages should not be surprising and is unlikely to concern the RBA because private sector wages have been decelerating over the past year. However, if there an upside surprise from individual wage contracts, this would raise hawkish risks and further delay the prospects of rate cuts.
   
• AUD: Australia October Labor force Survey: Citi employment forecast; 38k, Previous; 64.1k; Citi unemployment rate forecast; 4.1% , Previous; 4.1%; Citi participation rate forecast; 67.2%, Previous; 67.2% - Citi Research see prospects of strong hiring in October especially if businesses are gearing up for the summer months. Moreover, public sector hiring has remained strong and it’s unlikely to wane immediately. Other metrics of the labor market will likely remain solid too. Citi Research expect the underutilization rate to remain stable, while the number of hours worked likely picked up further. Overall, another strong LFS print in October has the potential to dash hopes for a rate cut in February, which is currently Citi Research’s base case. An unemployment rate of 4.1%-4.2% would still be below NAIRU, which suggests that the labor market remains tight.
   

Asia EM – China’s October activity, money supply and aggregate financing data in focus this week

• CNH: China Industrial Production (%YoY) October – Citi Forecast 5.8, Consensus 5.5, Prior 5.4 - production strength picked up further in the Manufacturing PMI survey. Crude steel output also stayed flat so far in October after a series of contraction.
   
• CNH: Retail Sales (%YoY) October – Citi Forecast 3.8, Consensus 3.8, Prior 3.2 - auto sales could continue to be boosted by the car trade-in-subsidy, the CPCA projected that auto sales could rise further to 8.2%YoY from 4.5%YoY in September (CPCA, Oct 24th). Supported by government subsidy and early started “Double 11” shopping festival, home appliances and smartphone sales could remain robust.
   
• CNH: Fixed Assets Ex. Rural (YTD, %YoY) October – Citi Forecast 3.5, Consensus 3.5, Prior 3.4 - FAI growth could pick up with easing efforts levelling up. Further fiscal support efforts for equipment upgrade from the summer could continue to support capex, while the NBS noted improving momentum in infrastructure investment (NBS, Oct 31st).
   
• CNH: China Money Supply (M1, %YoY) October – Citi Forecast -7.4, Consensus -7.2, Prior -7.4; Money Supply (M2, %YoY) – Citi Forecast 6.9, Consensus 7.0, Prior 6.8; New Yuan Loans (CNY bn) – Citi Forecast 700, Consensus 700, Prior 1590 - M1 growth could be closer to finding its bottom in this downcycle, and Citi Research expect a steady reading at -7.4%YoY. M2 growth could benefit from fiscal policy deployment and pick up further to 6.9%YoY.
   
• CNH: Aggregate Financing (CNY bn) October – Citi Forecast 1600, Consensus 1500, Prior 3763 - mortgage repricing happened only at end-October, and household long-term loans may not stage a rebound. Corporate credit demand could stay soft, with bill discount rate trending lower during October. Government bond issuance could provide some support of RMB1trn with steady issuance.