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Market Outlook: Continued stock market turmoil expected

  • Euro area inflation estimate published today
  • US labour market figures for August due Friday
  • Sweden’s Economic Tendency Indicator is continuing to deteriorate, according to NIER
  • New Nordic Outlook is out!

Last week ended with widespread stock market downturns after US Federal Reserve chairman Jerome Powell’s speech last Friday at the Fed’s Jackson Hole symposium. Between August 19 and August 26, Sweden’s All-Share Index (OMXSPI) lost 4.3%, while America’s broad S&P 500 Index fell by 4.0%. The Stoxx Europe 600 retreated by 2.6%.

The situation was different in the fixed income market, which seemed less surprised by Powell’s message of continued monetary tightening. Bond yields remained more or less unchanged last Friday. But on August 29-30, 10-year US Treasury yields climbed from 3.04% to nearly 3.15%, before retreating to around 3.11%.


Euro area inflation estimate published today

Eurostat’s flash estimate of euro area inflation during this month, which is being published on Wednesday, August 31, is one more piece of the puzzle ahead of next week’s European Central Bank monetary policy announcement. The consensus expectation is that inflation will increase from 8.9% in July to 9.0% in August.

Rising energy and food prices have led to very high inflation in the euro area, while hawkish signals from various ECB policymakers suggest that a key interest rate hike of 75 basis points might be needed at the next policy meeting on September 8.

The United States

US labour market figures for August due Friday

The American labour market statistics for August that will be published on September 2 may determine how much the Fed will raise its key rate at its meeting in late September. The fixed income market is currently pricing in a 68 bp hike in the federal funds rate, which implies more than a 70% probability of a 75 bp hike. Expectations diverge, but there is potential for strong US employment figures.

The Nordic countries

Sweden’s Economic Tendency Indicator is continuing to deteriorate, according to NIER
On August 30, the National Institute of Economic Research announced that its overall Economic Tendency Indicator fell from 101.4 to 97.5 and is below its historical average for the first time since January 2021.

Meanwhile the NIER’s consumer confidence indicator rose by a marginal 0.2 points from a record-low 56.3 last month and thus remains unusually downbeat. Consumer uncertainty has grown for the past year or so, making it harder for households to predict their financial situation.

New Nordic Outlook is out!

Because of accelerating inflation and rapid key interest rate hikes, the global economic outlook is deteriorating. We are adjusting our GDP forecasts sharply lower, especially for 2023. These and other economic developments in Sweden and the world are examined by our SEB Research colleagues in this year’s third Nordic Outlook report, which appeared on August 30.

To read the entire publication, click here

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 few days have brought renewed stock market turmoil. Last Friday’s tough monetary policy message from the US Federal Reserve, along with continued weak statistics, generated further uncertainty.

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 are 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 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.