Tighter central bank monetary policy

In the second half of August, the markets fell back to their end of July levels. This was apparently driven by the signals from the annual Jackson Hole symposium, where the chair of the US central bank was clear about combating inflation.

For the month as a whole, the US S&P 500 Index fell by 4.1 per cent measured in USD, while the European Stoxx 600 Index dropped 5.0 per cent measured in EUR and the Nordic VINX Index slumped 5.5 per cent measured in NOK. Here in Oslo, the Oslo Stock Exchange Benchmark Index (OSEBX) fell by a more marginal 0.4 per cent.


Tighter monetary policy

In the past few decades, the central banks have gradually increased interest rates during periods of recovery and cut them sharply during crisis periods. So the mantra about the central banks’ typical response has been “stairs up and the elevator down”. Due to a global inflation problem not seen for the past 40 years, this has now changed. The central banks are aggressively tightening monetary policy and trying to prevent things from getting out of control in a wage and price spiral. This was clear at the annual Jackson Hole symposium  arranged by the US central bank (FED), where “hawkish” signals from Fed Chair Jerome H. Powell led to interest rates rising again and to the markets falling.


Recession or a soft landing?

In order for inflation to really fall, we must probably see a weakening of the labour market. What is hoped for is a “soft landing” in which unemployment rises moderately and then flattens out. In practice, this is difficult to achieve, and unemployment has usually risen sharply once it starts to increase. Currently, however, the aim of reducing inflation is so important to the central banks that they are willing to risk a recession with much higher unemployment.


Energy crisis

A catalyst is often needed to push the economy from a late phase in the business cycle into a deep recession. Many people believe the sky-high energy prices will be the trigger this time, and a recession in Europe is now expected. Several factors will determine how deep it can be - such as various aid and rescue packages. This is something we have seen variants of before, for example during the pandemic. Unlike before, the European Central Bank is now aggressively tightening monetary policy to fight inflation.


The road ahead …

Following the market fall in the last half of August, global stock markets are back at the end of July levels.  Measured by the MSCI World Index, the markets dropped by around 4 per cent measured in local currency during the month as a whole, and have fallen by around 14 per cent so far this year. The tightening of monetary policy and fear of recession in Europe appear to be the main drivers behind the downturn. At the same time, the increased uncertainty means that the valuation has become more attractive, and shares still appear to be a good investment alternative.