The European week ahead: Stockholm’s Slowdown Syndrome

Market participants are set to receive a fresh picture of Sweden’s economic health in the week ahead, as global growth concerns have generally dampened consumer and business confidence in the country.

While the Swedish labor market has strengthened, with unemployment at its lowest level in a decade, broader economic conditions have been sending mixed signals, amid uncertainties over the pace of international growth, as well as elevated domestic household indebtedness.

Among the country’s economic sectors, the Riksbank – Sweden’s central bank – highlighted the housing market as “the greatest source of uncertainty” for developments in 2019.

According to the bank, household confidence, for instance, has recently been waning, and both household consumption and retail sales have “developed surprisingly weakly.”

The bank noted that although the upturn in housing construction had made “quite a substantial contribution to high GDP growth in 2014–2017,” that activity has now slowed and has dipped into negative territory.

Housing Watch and Financial Sector Risks

Indeed, downside risks from the household sector appear to have increased in several countries, including Australia, Canada, Norway and Sweden – each of which hold pristine ‘AAA’ sovereign credit ratings from certain ratings agencies such as Fitch and Moody’s Investors Service.

Fitch Ratings, for example, recently said it expects modest declines in home prices to continue in these countries’ major cities over the next two years due to a host of factors, including tighter credit standards and regulations, declining consumer confidence and the possibility of higher interest rates.

The Riksbank, which decided to keep its repo rate unchanged at −0.25% at its latest monetary policy meeting in mid-February, is expected to hike the rate at the end of 2019.

Fitch added that as “benign macroeconomic conditions recede, banks may face higher credit losses, particularly if unemployment increases.”

Slowdown

Against this backdrop, the market generally thinks the Swedish economy, while still on the upswing, has reached a peak and is now passing into a phase of deceleration.

Sweden’s National Institute of Economic Research (NIER), which anticipates the country’s GDP to grow by 1.5% in 2019, observed that the nation’s investment climate has reached “high levels” in parts of the business sector, and combined with the recent deterioration in business confidence, “considerable shortages” of skilled labor, and a continued decline in housing investment, there will likely be slightly lower business investment this year.

The Swedish economy expanded by 2.4% year-on-year in the fourth quarter of 2018, after a pace of 1.5% in Q3’18.

NIER further expects unemployment to bottom out in 2019 at 6.3% before rising somewhat in 2020, but resource utilization in the labor market will still be higher than normal. It added that despite the strong jobs market, wage growth will be “moderate,” and inflation is set to run below 2% both this year and the next.

In the latter part of the week ahead, investors will receive an updated Economic Tendency Survey from NIER for April, as well as consumer and manufacturing confidence, which will be followed by a decision from the Riksbank’s on its interest rate.

Thursday, April 25

• Economic Tendency (Apr)
• Consumer Confidence
• Manufacturing Confidence (Apr)
• Riksbank Interest Rate Decision

NIER cited in its March 2019 Economic Tendency Survey that the indicator again changed “only marginally,” edging down to 101.7 from 101.9 in the prior month, but still signals slightly stronger-than-normal sentiment in the economy.

The confidence indicator for the manufacturing industry fell 5.5 points, moving below 110 for the first time in more than two years, underscored by a decline in production expectations over the next three months.

NIER noted that recent years’ “strong depreciation” of the Swedish krona has increased domestic exporters’ international competitiveness, and manufacturing earnings are strong. However, demand for Swedish exports is growing “relatively slowly.”

The krona has shed roughly 9.0% of its value against the U.S. dollar since its most recent 52-week high set in mid-April 2018.

Meanwhile, while consumer sentiment climbed for a second month, is remains below its historical average. NIER attributed the increase in March to a rosier view of personal finances over the past year. However, pessimism about Sweden’s overall economy in the coming year has spurred caution about committing to major purchases.

Still, the softer confidence has had little impact on Swedish stocks.

In fact, the OMX Stockholm 30 Index rose for the fourth consecutive trading day Wednesday, with a gain of nearly 0.5% to a little over 1,655. According to Bloomberg, the index is 1.4% below its 52-week high set in late August 2018 but has soared more than 20% above its trough at the start of this year.

Moreover, Swedish equities – as evidenced by the iShares MSCI Sweden ETF (NYSEARCA: EWD), which has among its top holdings firms such as Telefonaktiebolaget LM Ericsson (NASDAQ: ERIC), Nordea Bank (OTCMKTS: NRDBY) and Volvo (OTCMKTS: VLVLY) – have climbed around 21.8% from their most recent 52-week low set December 24, 2018, nearly erasing its more than 22.4% plunge in the period from May-December 2018.

The Relative Strength Index (RSI) has signaled overbought conditions on EWD since early April 2019, standing in touching distance of 75 intraday Wednesday.

Ahead of the weekend, market participants will also receive:

Friday, April 26

• Retail Sales (Mar)
• Producer Price Index (Mar)

Investors will likely be eyeing further developments in Sweden’s housing market, as well as international factors that have been spurring growth concerns, including the unfolding of U.S.-China trade talks and Brexit for additional insights into the country’s general economic and financial well-being.

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