Weekly comment from Investment Center: Excessive concerns regarding stimulus withdrawal in the US

25-06-2013 14:18

Weekly Comment from Swedbank Investment Center: Lower unemployment in May is a positive signal for the Swedish economy. At the same time, excessive concerns remain regarding the stimulus package withdrawal in the US and the shrinking Purchasing Managers Index in China led to a drop in world stockmarkets last week.

This is how Sara Arfwidsson, market strategist at Swedbank Investment Center, summarizes the development of world stock markets last week.

"We should probably expect continued volatility for some time to come,” she adds.

Rising long-term interest rates
Last Wednesday the US Federal Reserve announced, as expected, that interest rates would remain unchanged. Ben Bernanke also stated that if the economy continues to improve, the Fed could reduce the pace of its asset purchases later this year and conclude the stimulus programme next year. These signals have contributed to a sharp rise in US long-term interest rates (and also long-term interest rates around the world) recently and to the dollar strengthening against other currencies.

What seems to worry the market most is that the stimulus withdrawal would cool the housing market in the US which, in turn, would affect consumption. It should be emphasized that the stimulus withdrawal is a positive indication of a healthy economy. Therefore, market reaction, with falling stock markets, seems to be excessive.

"What should be worrying the markets are the weak Purchasing Managers Index figures that China again reported,” says Sara. China, which has been the engine of the global economy for several years, has not been growing as much as the markets expected thus negatively affecting the stockmarkets.

"However, the positive signals in the US economy can be seen as offsetting the statistics from China,” she continues. Hopefully the US can now succeed China as the country that drives global growth forward.

Reduced unemployment
The positive news is that the Swedish unemployment rate fell sharply in May compared to the previous month and to May last year. The labour force increased at the same time as unemployment fell. This means that employment increased substantially and that more jobs are being created in the economy. At the same time this means it is increasingly probable that the Swedish Riksbank will not lower interest rates at its next meeting on 3 July, but will let them remain at the current one per cent.