Summing up last week, Sweden’s all-share equity index (OMXSPI) lost 0.55% between September 30 and October 7. In the United States, stocks pointed slightly upward – with the broad S&P 500 index gaining 1.51% – while the Stoxx Europe 600 moved 0.99% higher. In the fixed income market, 10-year US Treasury yields dipped below 3.57% on October 4 but ended the week at 3.88%; meanwhile 2-year Treasuries have recently been trading at their highest levels since August 2007.
Strong US jobs data putting pressure on Fed
US employment statistics released on October 7 showed continued strong demand for labour in September, causing stock markets to end the week on a sour note. The jobs report was equally bad news for the US Federal Reserve, which is now under pressure to hike its key interest rate even further to curb inflation. At present, stronger macroeconomic data are leading to gloomier stock markets, and vice versa. This may seem counter-intuitive, but right now additional key rate hikes are what scares the markets most, since such rate hikes risk pushing the world economy into a recession.
Inflation rates and central banks
This week, not so unexpectedly, inflation figures are a focus of market attention. Inflation continues to accelerate in neighbouring Nordic countries. Norwegian inflation surprised on the upside in September with an increase to 6.9% from 6.5%, and Danish inflation rose to 10% from 8.9% year-on-year. The market is nervously awaiting the publication on Thursday of US inflation figures, which have largely steered investor sentiment for a long time. We expect inflation (excluding energy prices) to rise on an annual basis. Sweden will also publish its inflation figures on Thursday. They are likewise expected to increase on an annual basis, adding to the Riksbank's worries.
On Wednesday (later today), the Fed will also release the minutes of its September policy meeting. Along with tomorrow’s inflation figure, the minutes should consolidate expectations of at least one more 75 basis point rate hike at the Fed’s meeting on November 2.
Towards the end of this week, the third quarter corporate report period will start off in earnest and we will see whether the market manages to shift its focus. Upcoming quarterly reports are unlikely to pose a major risk, but corporate forecasts might cause problems.
Rebound for SEB Housing Price Indicator
The SEB Housing Price Indicator, which measures the difference between the percentage of respondents who expect rising Swedish home prices and the percentage who anticipate falling prices over the coming year, climbed by five points in October to -35. Households in Sweden now expect the Riksbank’s key interest rate to reach 2.55% one year from now – an increase of 1.07 percentage points compared to last month. SEB’s household economist Américo Fernández finds it somewhat surprising that the Housing Price Indicator rebounded in October. Perhaps this is due to hopes that home prices have already fallen far enough and that we will now see a calmer price trend.
Our market view
The publication of US labour market statistics on October 7 led to a reversal of last week’s trend towards rising share prices and falling government bond yields. This may seem paradoxical since the jobs data showed a continued strong labour market. But the logic of financial markets says that this may mean that the Fed will have to raise its key interest rate more than previously expected in order to successfully combat inflation, which would increase the risk of a sharper downturn in economic growth. In spite of this, we are sticking to our overall market view from last week.
High and rising inflation, record-sized central bank interest rate hikes, very worrying signals from Russia about the Ukraine war and a European energy crisis are among factors that are causing financial market turmoil.
Many investors have become anxious, and surveys of both professional investor behaviour and the views of private individuals paint a pessimistic picture, which mirrors the downturns we have seen. It is hard not to get caught up in this anxiety, but a negative attitude among investors is, if anything, a buy signal. After all, the downturn we have seen is the market's way of adapting to tougher times. Much of the misery we are seeing today has already been discounted, and asset managers as a group are clearly holding a lower than normal proportion of equities in their portfolios.
Most investors seem to be counting on a mild recession – a relatively short period with a significant but manageable slowdown in economic growth. If things turn out worse than this, it will justify new market downturns, and vice versa.
We, too, expect a mild recession. Looking back at history, it is common for overall share prices to fall by somewhere between 20-35% in such cases: about where we are now. That suggests it is too late to sell.
Many forecasts (including ours) indicate that the worst will come this winter, with inflation peaking and growth bottoming out sometime around the end of 2022. Over the course of 2023, inflation will then start to fall and economic growth will accelerate. And since the stock market is forward-looking this suggests that in any event, a buying opportunity is approaching.
But right now the market is clearly worried and we are seeing a lot of headlines about inflation, central banks and other factors which indicate that things may turn out worse than investors expect. This may trigger further declines. During major crises we have seen stock prices fall by 50% or more, so there may be some way to go. Again, this is not our main scenario, but the risk is there and implies that it may be too early to buy.
Despite market concerns, this fairly balanced picture justifies our current view on risk-taking. We have a largely neutral risk profile in our portfolios, with good risk diversification across and within asset classes. If our main scenario proves correct, markets should be close to bottoming out, suggesting that investor increase their portfolio risks during the fourth quarter. In the short term, as usual we are closely monitoring developments and are also prepared to reduce our risk-taking if the outlook deteriorates further.