The fear of inflation has returned

For the month as a whole, the US S&P 500 Index fell by all of 8.7 per cent measured in USD, while the European Stoxx 600 Index dropped by a more moderate 0.6 per cent measured in EUR and the Nordic VINX Index declined by 0.6 per cent measured in NOK. Here in Norway, the Oslo Stock Exchange Benchmark Index (OSEBX) ended the month down 1.7 per cent.

Double interest-rate hike

The high rate of inflation is one of the items at the top of the agenda of the world’s central banks, which one after one have completely reversed their monetary policy. Sweden’s central bank, Riksbank, is one of these and in April it rather surprisingly and far earlier than notified raised the interest rate by 25 basis points. In the USA, fears that the rise in inflation will spin out of control have made the US central bank (FED) implement a double interest-rate hike. The market has priced in that the FED will continue to implement double interest-rate hikes at each of its next three interest-rate meetings. In addition, the market expects interest-rate rises at each of the remaining interest-rate meetings in 2022. If the market forecasts come true, this will be the quickest interest-rate normalisation process in modern times.

Will inflation flatten out?

A year ago, the FED promised that inflation was temporary. However, it has continued to rise and in April reached a provisional peak with annual growth of 8.5 per cent. There are many indications that the annual growth rate will flatten out in the end. The base effects of the sharp rise in energy prices and pandemic-related frictions in supply chains will make it difficult for inflation to continue to rise at the same rate. The speed at which it falls will depend on a number of other factors, of which the labour market and wage growth are two important ones. What will have major implications is whether inflation growth is 5-6 per cent in the USA at the end of the year, or whether it ends up down at 3 or 4 per cent.

Chinese lockdowns

China’s zero tolerance for COVID-19 has led to the closure of much of the country’s economy. Among other things, the lockdown of the area around Shanghai has helped to stop the flow of goods out of one of the world’s most important port areas. There is a danger that this will further worsen global inflationary pressure, leading to new bottlenecks and longer waiting times. One bright spot appears to be that the situation in Shanghai is improving, but new outbreaks cannot be ruled out. The Chinese authorities seem to be ready to stimulate the economy again to reduce its downside risk.

The road ahead …

The high rate of inflation, monetary policy restrictive measures and the war in Ukraine are some of the factors that have caused high stock-exchange volatility recently. At the same time, shares offer protection against inflation and company earnings have proven robust. Those are factors in favour of shares, and the real return in the bond market still appears low despite recent interest-rate hikes.