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Market Outlook: A focus on central bank minutes and Riksbank speeches

The Swedish stock market turned in a better performance last week, with the All-Share Index (OMXSPI) gaining more than 2.8% between March 25 and April 1. Meanwhile the Stoxx Europe 600 rose by 1.1%. In the United States, stock exchanges showed little movement for the week − with the S&P 500 Index closing 0.1% higher. Bond yields fell slightly from their peak but remain high. Ten-year US Treasury yields climbed above 2.55% on April 5.

The world

Major central banks are publishing their minutes
This week, minutes of the latest monetary policy meetings are being published, beginning on April 6 (today) with the US Federal Reserve. The European Central Bank (ECB) will follow suit on April 7. These documents are of interest in light of expected monetary tightening in both the US and the euro area due to high inflation. Preliminary March inflation figures for the euro area rose to 7.5% year-on-year, which was above market expectations.

The Nordics

Two speeches by the Riksbank’s Martin Flodén
In Sweden, the market is focusing its attention on two speeches by Riksbank Deputy Governor Martin Flodén. On April 5, he said that the Swedish central bank must re-evaluate its monetary policy at the next meeting on April 27, since “inflation has been significantly higher than in our latest forecast.” His speech on April 6 (today), entitled “Monetary Policy in a New Situation”, is likely to include new policy signals. Flodén will take questions from the media immediately afterward.

Our market view

The war in Ukraine continues, with great human suffering that has dominated world headlines. The pace of battlefield developments seems to have slowed. In recent weeks we have seen global stock markets recapture around half of their downturn since the beginning of 2022. Investors obviously expect the economic consequences of the war to be manageable − that it will not result in a deep global recession.

Aside from the war, there are also other factors indicating that economic growth is slowing. Even before the war broke out, alarmingly high inflation, continued disruptions in global supply chains and COVID-19 pandemic problems in China created headwinds for growth. These problems persist and in some cases have moved in a negative direction.

Many forecasters are lowering their economic growth projections for 2022, typically halving them to around 2% for Europe and to around 3% globally, a downward revision by about one percentage point. We at SEB are also joining this crowd.

Gross domestic product (GDP) continues to grow at decent levels – because we entered the year in a recovery phase with good underlying growth and due to support from increased fiscal stimulus programmes and capital spending, and possibly from pent-up consumption needs.

Meanwhile forecasts of central bank key rate hikes and long-term market bond yields are being adjusted upward relatively fast. Given the initial situation of ultra-low interest rates and yields, rising rates can be regarded as a healthy normalisation, but if they are too large and too fast, they will probably push down the stock market mood and share valuations.

Stock exchanges have concluded that the problems are of a more or less temporary nature. Because today’s share prices are still a bit lower than at the beginning of the year, the market has partly discounted the stronger headwinds described above. Given all the major forces now in play – the tragic war, troublingly high inflation, rapid and powerful central bank actions and rising bond yields – it is unusually difficult to identify short-term winners.