A superheated inflation week
This week, financial markets will be focusing a lot of attention on inflation statistics as the United States, the United Kingdom and Sweden report their August figures. The most important of these data points is year-on-year US consumer price index (CPI) inflation, which was published on September 13. It ended up at 8.3% – down for the second consecutive month, though higher than the market had expected. But core CPI, which excludes energy and food prices, climbed from 5.9% to 6.3%.
These inflation figures may be crucial to next week’s Federal Reserve meeting. Several Fed policymakers have recently made statements indicating that they are leaning towards another key rate hike of 0.75 basis points (bps). The US central bank will announce its interest rate decision on September 21.
This morning it was announced that in August, Swedish CPIF inflation (excluding changes in interest rates) was 9% year-on-year, up from 8% the previous month. This was largely due to higher food and energy prices. We also expect higher UK inflation figures today.
Decline in home price expectations stabilises
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, rose by two points in September, from -42 to -40.
According to SEB’s latest survey for September, households in Sweden expect the Riksbank’s key interest rate to reach 1.48% one year from now. This forecast represents a weak increase (0.03 bps) from a month earlier. But SEB expects the Swedish central bank to hike its repo rate rather aggressively this autumn, which implies that it may very well end up at around 2.25% by the end of 2022. This is considerably higher than household expectations.
A new Swedish government appears likely
After a dramatic election night – when the leftist bloc was ahead in the vote count for several hours but suddenly fell slightly behind the rightist bloc and never recovered – Sweden’s parliamentary election remains extremely close. The rightist bloc is currently leading by a single seat (175-174), with more than 95% of all votes counted. Wednesday (today) is the earliest day when we may learn the final outcome of this election drama, but further delays are possible.
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Our market view
A miserable first half of 2022 in stock markets was followed by a rebound at the height of summer, while the past several weeks have brought renewed stock market turmoil. At this writing, share prices are also pointing sharply lower after today’s troublingly high American core inflation figure.
In itself, it was not unreasonable that share prices climbed in July after falling by 20-30% since the beginning of the year. But this upturn was accompanied by continued discouraging signals about the global economic situation, especially in terms of growth.
There is certainly no shortage of worries at the moment. Growth forecasts are being revised sharply lower, and this is likely to continue for some time. Persistent inflation is forcing central banks to hike their key interest rates at an unusually rapid pace, while eroding household purchasing power – with the European energy crisis as the icing on the cake. Most analysts now expect a marked slowdown in growth over the next few quarters; recession is the word of the day.
Another reason why stock markets bounced back in July is probably that investors were nevertheless seeing signs that the situation may eventually improve. Inflation may soon peak, especially in the United States, and many people now expect that central banks, led by the US Federal Reserve, can start cutting key interest rates again in 2023.
Because of this year's overall stock market declines, valuations measured as price/earnings ratios have come down to more normal levels. However, they still have some way to go before reaching the lows seen during previous major growth slowdowns. Discounting an eventual turn for the better at this early stage consequently appears risky; disappointments during the autumn cannot be ruled out.
On the other hand, strong household and corporate balance sheets, easing global supply chains and cautious investor positioning suggest that we need not see the kind of downturns in growth and stock markets that followed the global financial crisis of 2008-2009.
Overall, we have a neutral view of risk-taking and recommend a “normal” asset class allocation. Given the prevailing major uncertainties, there is an obvious risk that we will be seeing dramatic shifts ahead, both within asset classes and between different types of equity investments. For this reason, diversification – risk spreading – appears to be a sound strategy.