Market Outlook: An eventful week, including central bank announcements

21 september 2022 09:45

An eventful week, including central bank announcements
Federal Reserve policy announcement today
Riksbank hikes its key rate by a record 100 bps
Flash PMI figures will be published on Friday
The new Investment Outlook is out!

After last week’s reports of high inflation figures, investors lost a lot of risk appetite and stock markets reflected their gloom. Consumer price index (CPI) inflation slowed in some countries, but core inflation – excluding energy and food prices – kept climbing in August. Sweden’s OMXS30 equity index was down 2.7% between September 9 and September 16, while the broad Stoxx Europe 600 fell by 2.9%. In the United States, the S&P 500 lost 4.8%. The 10-year US Treasury yield touched 3.60% on September 20, the highest level for more than 12 years, but closed a few basis points (bps) lower. This week is packed with central bank key rate announcements from such countries as Sweden, Norway, the United Kingdom and the US.

Federal Reserve policy announcement today

Although yesterday’s Swedish financial news headlines were dominated by the Riksbank’s record key rate hike (more below), global financial markets are of course mainly focusing on the US central bank and its monetary policy announcement due later today, September 21. Analysts expect a 75 basis point (bp) rate hike, although a larger one cannot be ruled out. The Fed will also publish new economic forecasts and a “dot plot” of its policymakers’ rate path predictions.

Riksbank hikes its key rate by a record 100 bps

Yesterday, September 20, Sweden’s Riksbank announced a key interest rate hike of 1 percentage point (100 bps) to 1.75%. This was higher than the widely expected 75 bps but entirely in line with market expectations.

Flash PMI figures will be published on Friday

Aside from this week’s key rate announcements, it is worth noting that on September 23, S&P Global will be publishing preliminary (“flash”) purchasing managers’ index figures for the US, the euro zone and some other advanced economies. The consensus view is that these PMIs will reflect a continued slowdown in economic growth, especially in Europe – which faces a troublesome energy crisis.

New Investment Outlook out!

Finding ways out of a barren landscape

The economic situation has deteriorated further since the summer. We are heading into a clear slowdown, perhaps best described as a mild recession. We expect genuine weakness in 2023 as a whole, but we believe that 2024 will show a clear improvement in economic growth. Falling growth and rising inflation have had a severe impact on stock and fixed income markets. But depressed risk appetite, more palatable valuation levels and a light on the economic horizon will help us to achieve a balanced picture of the appropriate risk level in our portfolios, despite potential hazards.

Yesterday we published the latest edition of our quarterly Investment Outlook report, in which you can see our forecasts for equities, fixed income and other asset classes and read in-depth theme articles about current trends.

You will find all this material here (seb.se)
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Our market view

In yesterday’s Swedish financial news, the Riksbank's interest rate hike drew far more attention than our own Investment Outlook, which makes perfect sense. But even though some headlines described it as a "monster hike", the market reaction has been fairly restrained.

After all, a big rate increase was expected, with the most common prediction being a 0.75 percentage point hike, but enough observers believed there would be a 1.0 point hike that the surprise effect of such an event would be small. We largely share the Riksbank's assessment that Swedish inflation will rise from today's 9% to around 11% this winter before peaking and that we will see some more rate hikes, though smaller in size.

Otherwise we refer the reader to Investment Outlook. The text below is from the introduction of that report, which describe our market view:

The first several weeks of summer offered a much-needed stock market rebound, after the powerful risk aversion that had prevailed during the first half of 2022.
But now that the holiday period is over, market turmoil is back – driven by a combination of factors.

Inflation remains high and central banks have clearly stated that they must prioritise tackling it, even though this will come at a cost in terms of economic growth and the risk of job losses. The Ukraine war continues to grind on, and an energy crisis is contributing to persistently very high natural gas and electricity prices, while oil prices appear to have peaked. The energy crisis is primarily plaguing Europe and is not as acute elsewhere in the world, such as in the United States. In addition,

China’s growth has slowed due to weak international economic conditions, a fragile domestic real estate market and the country’s continued restrictive COVID-19 policy. The overall result is that the global corporate sector is signalling tougher times, with uncertainty largely connected to future demand, that is, sales volumes. From a consumer perspective, cash flow has deteriorated rapidly as inflation has eroded purchasing power, with skyrocketing energy prices and rising interest rates as well.

Put simply, there are numerous major sources of concern on the horizon. The world’s macroeconomists have continued to downgrade their growth forecasts, with most of them agreeing that a recession is approaching. However, there is still considerable disagreement among analysts about how deep and prolonged it will be.

From a capital market perspective, it is thus reasonable to ask whether the above concerns have been sufficiently discounted by investors. One global stock market index in local currencies has fallen by around 17 per cent this year. Price-earnings (P/E) ratios have ended up at around 15, while US 10-year Treasury yields have climbed above 3 per cent and credit spreads for high yield corporate bonds have widened to around 5 per cent. Meanwhile one US dollar costs nearly 11 Swedish kronor.

In a shallow and short-lived recession, earnings contraction in the corporate sector is often limited. Today’s pricing of equities and corporate bonds has largely discounted this, which is also in line with our main scenario. But if the downturn results in a deeper and more structural crisis, it is reasonable to assume that risk aversion will increase again and that the negative stock market trend will persist. This issue of Investment Outlook provides a detailed look at our views about future market developments, risks and opportunities as well as appropriate portfolio structures.

In addition to our overall view of investment portfolios, of course we report on conditions surrounding individual asset classes and on their potential. This issue also includes three theme articles. The first is a review of our take on biotechnology, a cyclically insensitive sector with a growth profile. Our second theme article looks at how investors can identify which companies are actively engaged in the transition to a more sustainable world. Our third theme article looks at current conditions in China. The country is lagging behind its official targets. How do things look as we approach 2023?