Although the Fed had not been expected to reveal any earth-shaking news after its latest policy meeting, financial markets were disappointed when Chairman Jerome Powell stated that the path the US economic recovery will take is unclear. Although the Fed indicated that its key interest rate will remain close to 0% until 2023, the US central bank did not signal any new stimulus measures in the near future. According to Powell, the Fed will do what it can to support the economy, but achieving a full recovery will depend on virus control and on policy actions taken at all levels of government – a signal to fiscal policy makers.
Little near-term prospect of new US stimulus package
Meanwhile, tensions between Democrats and Republicans as well as positioning ahead of the US elections on November 3 are making it hard for Congress to reach agreement on a new fiscal stimulus package. Federal budget negotiations are now also being overshadowed by the issue of choosing a new Supreme Court justice, following the death of Ruth Bader Ginsburg. Since such appointments are for life, they are an important source of political power in the United States. The chances that Congress will enact a new stimulus package before election day are thus close to zero.
Our main scenario is still that Joe Biden will win the presidential election and that his fellow Democrats will also gain control of the Senate by a narrow margin. This should at least enable him to push through those elements of his policy programme that can be included in the federal budget, which requires only simple majorities in the House and Senate. A lot of things can happen between now and November 3 – the first debate between Biden and President Donald Trump is scheduled for September 29.
Worries about new pandemic lockdowns around Europe
Another factor contributing to more muted market performance is the risk of new lockdowns to prevent the spread of COVID-19 and their possible effects. On September 18, Denmark lowered the number of people allowed at gatherings and shortened the hours that restaurants may be open. New restrictions in Spain have led to protests, since some poorer districts of Madrid are included. On September 21, Norway prohibited gatherings of more than 10 people in private homes. The United Kingdom is currently updating its restrictions as well. There is a risk that more European countries will be forced to impose renewed pandemic-related restrictions in the near future.
Sweden: Zero key interest rate for a long time to come
In its September 22 monetary policy statement, the Riksbank made no changes in its key interest rate, which it instead believes will remain unchanged until late 2023. Meanwhile the Swedish central bank is revising its GDP growth forecast upward. The Riksbank's labour market assessment is also slightly more optimistic and it has lowered its inflation forecasts. As expected, market reactions have been small. Our forecast is that the repo rate will remain at 0% for a long time to come and that the Riksbank will continue its stimulative asset purchases, expanding them as needed if it detects signs that Sweden's recovery is faltering.
Norway: A tough balancing act
Earlier this week, the Norwegian government unveiled a new fiscal stimulus package. New measures include relief for the tourism and event sector and an extension of the existing wage support programme for businesses. The focus of interest in the September 24 policy meeting of Norges Bank is on whether the central bank plans an earlier start to the rate hiking cycle it has signalled starting in late 2022.
In August the Monetary Policy and Financial Stability Committee concluded: "The policy rate will most likely remain at today's level for some time ahead." An unchanged policy rate is thus expected at the September 24 decision. Norges Bank is balancing risks related to rising financial imbalances and a prolonged economic downturn. These risks have been accentuated since June, while economic developments have been broadly as envisaged. Consequently, we believe that Norges Bank will only make minor changes to its rate path.
Our market view
In recent weeks the spring and summer stock market rally has been replaced by greater investor nervousness and more anaemic market performance. Worries about the effects of new coronavirus outbreaks and share price declines for the "digital dragons" (including Facebook, Amazon and Google) after their dizzying upturns are driving market volatility. We expect new COVID-19 outbreaks to be met with "smart" lockdowns and believe that governments and central banks will supply the necessary stimulus measures, although the most recent announcements – especially from the US Federal Reserve – have not pointed in this direction, thus contributing to the stock market dip.
We also expect the digitisation trend to continue, which in itself will enable digital technology companies to keep generating good growth and solid earnings. Although the stock market can hardly climb as quickly as this past summer, and although their valuations are considerably higher than the market average, we foresee continued good growth for digital companies and thus regard the latest downturn in their share prices as a temporary correction.
We foresee good fundamental conditions for equities, including healthy economic growth as well as low interest rates and bond yields. Given the surge in stock market indices over the past six months, this bright outlook is already largely priced in, making the market more sensitive to negative news. But there are good arguments for accepting higher valuations, especially low interest rates and yields along with major stimulus packages, which suggest continued good growth.
Looking ahead, we expect a more normal stock market pattern after the vigorous recovery, but we are sticking to our recommendation of an overweight in equities and other risk assets such as corporate bonds in the high yield segment.