Despite a solid report season that continues to showcase strong corporate performance, stock markets as a whole are not climbing in response. America’s “digital dragons” again delivered earnings that greatly surpassed expectations. In commodity markets, the price of copper on the London Metal Exchange is just short of an all-time high and climbed above USD 10,000/tonne for the first time in more than a decade.
New GDP figures show stronger growth than expected
In the United States, gross domestic product (GDP) rose by an annualised rate of 6.4% between the fourth quarter of 2020 and Q1 2021 (1.6% quarter-on-quarter). In the euro area, GDP fell by 0.6% quarter-on-quarter, but it is worth recalling that a few months ago we thought that the downturn would be much larger. In Sweden, GDP rose by more than 1% quarter-on-quarter.
Not yet the right time to discuss “tapering”
As predicted, last week the US Federal Reserve did not deliver any major changes in its monetary policy. However, Fed Chairman Jerome Powell emphasised that it is too early to talk about “tapering” – the central bank’s term for phasing out its stimulative bond purchases. The Fed believes that US inflation will probably climb further for some months before slowing down again. The bank is thus playing down the risk of more long-lasting price pressures. Historically, the Fed has announced major initiatives around the time of its annual conference in Jackson Hole, Wyoming, which takes place in late August. This year, too, we believe that the bank’s September policy meeting will include a new initiative in the form of an announcement that tapering will begin late this year.
Phase 4 of Swedish vaccinations and EU opening for tourism
Earlier this week, Swedish media reported on how the fourth and final phase of Sweden’s vaccination programme has unofficially begun in several regions, with anyone over 18 now eligible for the COVID-19 jab. A surprisingly large share of vaccination slots remain unfilled, especially in Stockholm, making it possible to move on to the next phase of the vaccination campaign earlier than planned.
On May 3 the European Commission took a step towards actually opening up opportunities for international tourism, both within the European Union and by visitors from other countries. In any case, this will apply to fully vaccinated travellers or those coming from countries that have a good COVID-19 transmission situation. This will undoubtedly be a major element of the economic recovery, especially for countries in southern parts of the EU that are traditional summer holiday destinations. The Commission is hoping for decisions in May.
Nordic Outlook: Focus on inflation risks as COVID-19 recedes and the upturn accelerates
The latest issue of SEB’s quarterly Nordic Outlook research report, which was published yesterday (May 4), predicts that global economic growth will take off during 2021-2022 as virus transmission diminishes. This, in turn, will lead to an inflation impulse. But the main scenario is that this higher inflation will not be very long-lasting. Global GDP will grow by 5.9% this year and 4.3% in 2022, after falling by more than 3% in 2020, according to the May issue of Nordic Outlook.
In Nordic Outlook, our experts discuss and analyse the current macroeconomic situation and global developments. They also provide an in-depth look at various economic topics. For further information, see below.
Nordic Outlook May 2021
To read Nordic Outlook in English, click on the first link below. For an hour-long webcast in Swedish featuring SEB’s Chief Economist Robert Bergqvist and Head of Economic Forecasting Håkan Frisén − moderated by our own Johan Hagbarth − click on the second link.
Press release and full report
Our market view
Recovery will support stock markets
Corporate earnings reports for the first quarter of 2021 are now pouring in. So far the trend of the past few quarters is continuing, with upside surprises predominating in the reports. The rather lukewarm market reaction probably reflects sizeable increases in share prices ahead of the reports. We remain relatively upbeat about stock markets, as explained below.
Strong investor faith in a coming economic recovery is providing continued support to stock markets. Another contributing factor is that the upturn in US Treasury yields has levelled off somewhat in recent weeks. Most observers, including us, expect further small upturns in yields during 2021 and believe that sharp earnings increases among listed companies will provide sufficient support to share prices.
Excessively rapid and/or large yield increases may of course disturb this scenario. Likewise if production disruptions − such as the semiconductor and other component shortages reported by many companies − have an impact on corporate earnings. The quarterly report season that is now under way will be important to future share prices. Despite these risks and recent price upturns, we are sticking to our cautiously optimistic view of stock markets.
In our main scenario, we anticipate a clear economic recovery starting this spring or summer, with solid growth at least well into 2022.
In an economic recovery, cyclical value companies should be able to regain some lost ground, but looking further ahead the digitisation trend will continue to benefit growth companies. Sizeable worldwide investments in sustainability suggest that last year's strong performance for companies with this type of strategy may continue.
Share valuations today are undoubtedly high from a historical perspective, but can be justified by lower interest rates and bond yields as well as a strong earnings outlook. These high valuations limit upside potential in the long term, but they are rarely a good signal to sell in a short-term perspective.
Continued potential, though a lot has been priced in
Given today's low interest rates and yields, it is hard to find good alternatives to stock market returns. Meanwhile, central banks and governments have established a floor by promising continued stimulus.
This suggests that the growth picture will have to become much worse, causing downward adjustments in companies' earnings forecasts, and/or yields will have to climb much more than expected, for major stock market downturns to materialise. Recent market upturns naturally increase the risk of profit-taking, with downturns of 10% or perhaps 15%, yet we expect stock market indices to be a little higher this coming autumn than today.