Market Update – 17th March 2021.

Global equity markets have, by and large, traded sideways so far this week ahead of monetary policy meetings at the Fed, BoE and BoJ.

While the rapid and successful vaccine rollout in the US and UK, coupled with Joe Biden’s $1.9tr fiscal stimulus package obviously helps economic growth forecasts, we aren’t expecting any of these central banks to make any changes to their interest rates or QE policies.

However, that certainly doesn’t mean that these meetings are irrelevant.

Given the current raging inflation (and interest rate) debate, we will be paying particular attention to the Fed’s ‘dot-plot’, which shows the interest rate expectations of each policymaker on the Fed’s monetary policy committee.

If the Fed’s policymakers believe that the faster inflation we have previously talked about at length in these Market Summaries, is simply a transitory spike due to the pass through of coronavirus distortions, then the vast majority of the dots should suggest there won’t be an interest rate rise for several years.

However, if the dots show policymakers believe that an increase in interest rates could start within the next year or two, it would suggest that policymakers are willing to consider increasing interest rates not only when inflation is below their 2% target, but also before the US achieves its full employment objective.

As an aside, yesterday’s (16 March 2021) US retail sales data for February also suggests to us that the US does not need higher interest rates.  Admittedly, the data is distorted by January’s sharp jump (which was due to the last US fiscal stimulus package in late December) and February’s exceptionally cold weather across large parts of the country, no matter how you slice and dice the data for insight, the 3% fall in retail sales is disappointing, especially as the US consumer accounts for over two-thirds of the US economy.  And although, we expect to see US retail sales to recover strongly in the next couple of months thanks to the $1,400 payment qualifying Americans get from Joe Biden’s stimulus package (please see here for more information), history suggests that this boost may fade before the US economy fully reopens.

Investment Management Team