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Market Outlook: When will the Riksbank end its zero key interest rate?

  • The report season is in full swing
  • China may take further steps to stop COVID-19
  • The Riksbank will make a policy announcement

Last week Sweden’s All-Share equity index (OMXSPI) lost 1.3%, while America’s broad S&P 500 index fell by 2.8% − despite a decent start to the corporate report season, with some exceptions. In the fixed income market, 5-year US Treasury yields rose above 3%, while 10-year Treasury yields touched 2.95%. Both have since fallen and were trading in the 2.75% range early this week.

The World

The report season is in full swing

In the United States, one fifth of S&P 500 companies have released their quarterly reports. For the first time in more than two years, percentage earnings growth is in single digits. This is partly because of tougher comparative figures, but also because some companies are facing greater challenges. In Sweden a number of industrials have released their results, which have generally indicated a strong first quarter.

Later this week, preliminary figures for gross domestic product (GDP) in the first quarter of 2022 will also be published, giving us a better economic overview of the US, Sweden and the euro area.

The Nordic countries

China may take further steps to stop COVID-19

Now that the latest wave of COVID-19 has reached Beijing, financial markets are worried about further large-scale lockdowns in China. There is thus a risk of continued global problems with the supply of input goods and high freight costs.

The Nordic countries

The Riksbank will make a policy announcement

The high point for financial market players in Sweden will be the Riksbank’s monetary policy announcement on April 28 (tomorrow). The Swedish central bank is not alone in having underestimated inflation pressures and will be forced into a major reversal of its monetary policy. A Riksbank key interest rate hike no later than in June is highly likely, but the market is pricing in a hike as early as this Thursday.


Our market view

This year’s initial stock market downturn − driven by rising inflation − intensified when the tragic war in Ukraine began in late February. Even before the war broke out, alarmingly high inflation, continued disruptions in global supply chains and COVID-19 pandemic problems in China created headwinds for economic growth. These problems have persisted, or worsened. Inflation continues to climb both in the United States and the euro area to levels we have not seen in 30–40 years.

Rising inflation and energy costs are of course hurting household purchasing power, while the Ukraine war and other above-mentioned problems are contributing to a slowdown in economic activity. Many forecasters are also lowering their growth projections for 2022, typically halving them to around 2% for Europe and 3% globally, a downward revision by about one percentage point. We at SEB are also joining this crowd.

Gross domestic product (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 capital spending, especially in the energy field, and possibly from pent-up consumption needs combined with solid household savings surpluses.

The US is hiking its key interest rate

Meanwhile forecasts of central bank key rate hikes and long-term market bond yields are being adjusted upward relatively fast. Ten-year US Treasury yields, which serve as a global fixed income market benchmark, have soared and were in the 2.75% range early this week.

Most forecasts also indicate that the US Federal Reserve will raise its key interest rate faster and in larger increments than usual – with the federal funds rate moving towards 2% by year-end and 2.5−3% during 2023. 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. There is thus a higher risk of investor disappointments.

The growth phase is not over

Yet stock exchanges seem to have concluded that the problems are of a more or less temporary nature. Our main scenario is still that a global recession can be avoided, and that even if 2022 will probably be an off-year from a growth and corporate earnings perspective, the economic growth phase is not over. 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 thus maintaining our small overweight position in equities but are awaiting clearer signals about new developments, which we are of course following closely.