The United States
US retail sales and industrial production climbed in April, Tuesday’s figures show
On May 17 (yesterday), US retail sales and industrial production statistics were published. Consumption has recovered strongly after plunging when the COVID-19 pandemic began. Inflation-adjusted retail sales are now above the trend prevailing before March 2020, but household purchasing power has been squeezed by rising inflation in the past 12 months. Tuesday’s figures show a 0.9% year-on-year increase in US retail sales, with auto dealers leading the way but most retail categories posting gains. This was slightly below the 1% consensus forecast, but faster than inflation.
Meanwhile US industrial production rose by a respectable 6.4% year-on-year in April. Industrial production refers to the total inflation-adjusted value of output produced by manufacturers, mines and utilities.
The United Kingdom
British inflation statistics released on Wednesday
Perhaps the most interesting macroeconomic figure of the week is the British year-on-year inflation rate, published this morning, May 18. It climbed to 9% in April, up from 7% in March − a level not seen since the early 1990s. One reason for this sharp increase is an adjustment in price caps for electricity and natural gas. The Office for National Statistics, which publishes the UK's inflation rate, said the price of food, transport and machinery also drove prices higher. Fiscal stimulus and pay increases in a still hot British labour market are providing some compensation, but the coming year will be challenging for British households and businesses.
The Nordic countries
Swedish home price index will be published on Thursday
Valueguard will publish its HOX index of price trends in the Swedish housing market on Thursday. Our forecast is that home prices will fall slightly and that there is a major risk of further price downturns, especially if market expectations of a 2.5% Riksbank key interest rate by mid-2023 prove correct.
Our market view
Since SEB published its Nordic Outlook research report last week, our market view has not changed. The following is a summary of the conclusions in Nordic Outlook.
A risky balancing act
The size of downward revisions in economic growth and corporate earnings will determine the long-term potential for equities, during a year when central bank expectations are controlling the short-term stock market mood. A soft landing − without either large further interest rate and bond yield upturns or overly weak growth − are discounted on stock exchanges, where the most aggressive share valuations have been lowered. If this balancing act is successful, there is hope for decent stock market performance.
In the first four months of 2022, stock market conditions have increasingly come to resemble a pessimist's Christmas. Rising inflation, interest rates and yields, downward adjustments in economic growth forecasts, continued disruptions in global supply chains, soaring energy prices, a tragic war on European soil and forceful pandemic lockdowns in China – the factory of the world − are creating great concern among investors.
The normalisation of rates, yields and monetary policies is largely welcome. But aside from pushing down growth, troublingly high inflation is of course creating the risk of bigger key interest rate hikes. The surge in bond yields raises the question of when fixed income investments will come into play. Our forecasts point to moderately rising yields, which need not trigger any stock market drama. In recent years, interest support has turned into a headwind for stock markets.
It is worth noting that because of rising yields and wider credit spreads, running yield for an investment grade US bond index has climbed to above 4 per cent. The corresponding figure for high yield bonds is nearly 7 per cent. As yields reach increasingly investable levels, the TINA (There Is No Alternative) argument is weakened.
Global economic growth forecasts are being dialled down, and not only by us. But so far this has not had a major impact on aggregate corporate earnings forecasts. Global earnings forecasts for 2022 have only been lowered marginally this year: from +8-9 to +5-6 per cent. Forecasts for 2023 are stable at around 8 per cent. This year's forecasts may well be lowered further, but if these forecasts hold, they will help sustain share prices, especially since price/earnings ratio valuations have generally fallen in recent quarters.
Positioning provides support. Not only are companies continuing to show good adaptability, but a more cautious approach and positioning by investors is also providing reasonable support for share prices. Expectations have been lowered, and professional investors have reduced risk in their portfolios by holding a higher proportion of cash equivalents and a lower proportion of equities than the historical average. In equities, they are overweighting more stable sectors such as pharmaceuticals at the expense of industrials. Geographically, they are more cautious about Europe, which is logical given geopolitical and growth concerns.
Among this year's losers are previous winners − growth companies. This means that bloated valuations for these companies have come down and the historically wide gap compared to other market segments has narrowed. This is most evident in smaller companies with the very highest valuations, but global digital dragons Facebook/Meta, Apple, Amazon, Microsoft and Google/Alphabet (FAAMG) also follow the pattern.
With storm clouds overhead and unusually powerful forces in motion, we expect stock market performance in the coming months to be determined by the news about inflation, central banks and economic growth potential. There are major challenges, including the risk of higher inflation, rates and yields if central banks are unsuccessful in their battle against inflation. Another risk is that growth will be squeezed towards recession, eroding corporate earnings and justifying lower share valuations. But if inflation can be curbed and if growth forecasts hold up, we see potential for stock markets to deliver a reasonable return given the risk.