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Market Outlook: Rising yields ahead of crowded macroeconomic calendar

Stock markets showed mixed performance last week. In the United States, the S&P 500 equity index rose by 1.8% from March 18 to March 25, while the Stoxx Europe 600 index was more or less unchanged. Sweden’s All-Share Index (OMXSPI) lost 3.6%, however. In the fixed income market, 10-year US Treasury yields peaked at 2.50% on March 25 but retreated early this week to around 2.40%.

The flash purchasing managers’ indices (PMIs) that began to be published last week by IHT Markit show economic stability (=strength), while gross domestic product (GDP) growth forecasts are broadly lower.

The world

Central banks continue to drive yields higher

Government bond yields continued to climb in response to hawkish statements by central bank policymakers. Ten-year US Treasury yields climbed to nearly 2.50% last Friday, their highest level in nearly three years. In Sweden and elsewhere in Europe, bond yields are now well above their early March levels.

March statistics are due in the next several days

This week’s most-watched macroeconomic event will be the publication of American labour market statistics for March on Friday, April 1. On Thursday, March 31, the US will also release the Personal Consumption Expenditures (PCE) Price Index, which is the Federal Reserve’s official inflation metric.

In the euro area, labour market statistics will be published on Thursday and preliminary inflation figures for March on Friday.


COVID-19 lockdowns in Shanghai

China is currently experiencing its biggest COVID-19 outbreak since the pandemic began more than two years ago. This past weekend, officials announced that parts of Shanghai will be locked down, including the financial district and certain industrial areas. Inhabitants will work from home, while public transport will be shut down.

Updated SEB macroeconomic forecast

A deceleration, but no sudden stop

The Ukraine war is having a sizeable economic impact. We have lowered our 2022 global GDP growth forecast from 4.1 to 3.2 per cent. Our downward adjustment for the euro area is much larger than for the US and the Nordic countries. Fiscal initiatives − especially in defence and energy − will soften negative effects. The war is speeding up inflation, and labour markets will not weaken enough to persuade central banks to hold off on monetary tightening. We expect more and earlier key rate hikes.

Our market view

In the shadow of the tragic war in Ukraine, in recent weeks we have seen global stock markets recapture around half of their downturn since the beginning of 2022. This may seem surprising, considering what is happening. Investors obviously expect the economic consequences of the war to be manageable - that it will not result in a deep global recession.

There are also other factors indicating that growth is slowing down. Even before the war broke out, alarmingly high inflation, continued disruptions in global supply chains and pandemic problems in China created headwinds for growth, and these problems persist.

However, 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 are also joining this crowd, as indicated in the above-mentioned SEB forecast update.

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 also from pent-up consumption needs.

Meanwhile forecasts of central bank key rate hikes are being adjusted upward. Long-term market bond yields are also rising 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. At the moment, investors also seem to be reacting positively to moves towards negotiating an end to the Ukraine war. 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. We are maintaining our small overweight position in equities but are awaiting clearer signals about new developments, which we are of course following closely.