Macro muscles have lifted the stock market
Over the past week, financial markets have been supported by super-strong job data, which have lifted stock exchanges in the United States. America's broad S&P 500 equity index has now gained around 27% so far this year, while the MSCI World equity index has risen around 20% (both in US dollars).
The growth in US non-farm payrolls was surprisingly high in November. Meanwhile job growth data for recent months were revised upward, and wage growth remained at moderate levels. Unemployment fell to 3.5%, a new 50-year low. There are also hopes that the US-Chinese trade negotiations will lead to an agreement that will prevent US tariff hikes on imports from China scheduled to kick in on December 15. These tariffs would have a greater effect on consumer products and thereby risk having a more direct impact on US voters. Since a preliminary US-Chinese trade agreement was announced in mid-October, signals have been mixed. Trade policy successes or setbacks may determine whether stock markets will remain at record-high levels until the end of 2019.
Will BoJo win the British parliamentary election?
According to election forecasts, Prime Minister Boris Johnson − who currently heads a minority government − will lead his Conservative Party (Tories) to victory on Thursday, December 12, thus paving the way for a majority government.Yet on occasion, British opinion polls have diverged quite noticeably from final election results. One reason is that the Labour Party, led by Jeremy Corbyn, is supported by more young people − whose opinions are not always fully captured by pre-election voter surveys. If the Conservatives do win a majority, the United Kingdom is likely to implement Brexit (British withdrawal from the European Union), since the prime minister has promised voters that the UK will leave the EU on January 31, 2020. If this happens, in February the UK will enter a transition period of 11 months.
The Labour Party would prefer to negotiate new Brexit terms and hold a second EU referendum next year. The Liberal Democrats would like to cancel Brexit completely, so if they win a kingmaker role in Parliament, they will probably also want a new referendum. If no party wins a majority, there is a risk of financial market turmoil and a weaker British pound, since this would increase the risk of a "no-deal" Brexit on January 31. But perhaps the UK will again ask the EU for more time instead.
An OPEC+ agreement and a record-sized IPO
Last week's meetings between the OPEC oil cartel, Russia and nine other producer countries ("OPEC+") resulted in an agreement to reduce the oil supply, but this was largely a formalisation of production cuts that had already been implemented. If all countries stay within their agreed output limits, Saudi Arabia − as an extra carrot − will cut its production further. The agreement expires in March 2020. Brent crude oil is now trading at around USD 64/barrel, in line with its average for the past year. The world's largest initial public offering (IPO) to date also took place, with Saudi Arabia selling 1.5% of its state-owned oil company Aramco to outside shareholders for nearly USD 26 billion, thus breaking Alibaba's IPO record.
Swedish home price expectations are stable at a high level
The proportion of Swedish households who expect home prices to rise increased this past month and is now at 60%. Meanwhile the proportion of households who expect falling prices rose to 17%. As a result, SEB's Housing Price Indicator for December − the difference between those who expect rising prices and those who expect falling prices − increased slightly to 43. At the regional level, Skåne remains at the top.
Our market view
Clear signs of stabilisation in macroeconomic statistics have provided continued support to stock markets. A number of equity indices, including both the broad American S&P 500 and the narrower Swedish OMX index, have reached new highs.
Dovish signals from central banks are providing support, although after its October rate cut the US Federal Reserve (Fed) is now signalling that it will await coming economic developments. Long-term bond yields have rebounded after this year's sharp downturn, but they remain at extremely low levels. This past autumn, macro statistics reinforced the picture of continued global deceleration. The most recent signals are pointing upward, or at least towards a broad-based stabilisation in major economies, though of somewhat varying strength. Together with support from central banks, this means that we foresee less risk of recession over the next couple of years. This applies especially to the US, where a continued solid labour market is helping to sustain growth.
The uncertain economic situation, along with rising share prices, is stretching market valuations further, suggesting price fluctuations ahead. The lack of investment alternatives (due to extremely low interest rates and bond yields) and decreased risks related to both growth and trade problems may nevertheless provide continued support to stock markets.
This week's agenda
This week is packed with central bank policy meetings and economic statistics, as well as the British parliamentary election.
- December 11 − Inflation data in Sweden and the United States. Our forecast for Swedish CPIF (consumer price index minus interest rate changes) is 1.6%, while our forecast for US core inflation is 2.3%.
- December 11 – US Federal Reserve policy meeting. Anything but an unchanged Fed key interest rate would be a huge surprise, but we are forecasting a rate cut next spring.
- December 12 – European Central Bank meeting. The euro area economy is continuing its deceleration, but there are indications that it is stabilising. The ECB is not expected to make any monetary policy changes.
- December 12 − British parliamentary election. Odds-makers foresee a Conservative majority government.
- December 13 − US retail sales. Sales have slowed after a strong summer, and we expect a 0.3% increase in November, which is slightly less than market forecasts.
Please contact your private banker if you have any questions or concerns.