Week ending 30th April 2021.

It has been an interesting week:  recent robust economic data allowed Jay Powell, the Fed Chair (the US central bank), to talk optimistically about the economic outlook, while at the same time effectively reminding the market of the famous mantra ‘don’t fight the Fed’, as he repeated it was far too early to consider tighter monetary policy.

And it is easy to see why:  the core PCE reading, the Fed’s preferred inflation measure, again came in below its 2% target at 1.8%.  Although we fully expect this inflation measure to rise above their 2% target in the coming months due to last year’s distorted prices, these effects will quickly fade as they pass through, rather than resulting in persistently high inflation.

Additionally, while it was announced yesterday (Thursday 29 April 2021) that the US economy expanded by an impressive 6.4% during the first quarter, this dramatically contrasts with today’s (Friday 30 April 2021) data release which showed that the Eurozone’s economy shrank by 0.6% over the same period.

The US economic recovery has been helped by a number of fiscal stimulus payments to US households over the past year, which has boosted both the savings rate and consumer spending.  As an aside, Visa (the card payment company) this week said that spending on debit cards had grown dramatically relative to credit card spending – and we find this particularly interesting as it suggest to us that US consumers are being cautious – which we see as positive as it is more likely to result in a long-lasting consumer recovery rather than a massive splurge which quickly fades.

Unfortunately, despite this week’s positive economic data readings and strong company results, as you can see from the accompanying table, equity markets ended the week pretty much flat after Robert Kaplan, the President of the Federal Reserve Bank of Dallas, contradicted Jay Powell by saying the Fed should start to tighten monetary policy.

This shouldn’t have been a surprise to markets as he has previously indicated (via the Fed’s dot-plot) that US interest rates should be increased.  Additionally, the Fed has a dual mandate, which includes employment – and there remains millions of Americans out of work.  And furthermore, he isn’t even a voting member on the Fed’s monetary policy committee!

Looking ahead to this coming week, we have a BoE monetary policy meeting on Thursday (6 May 2021); Eurozone retail sales; US ISM; US factory orders; US employment data (non-farm payrolls; unemployment rate; participation rate; and average earnings); Chinese PMI; and Chinese import/export data.

Investment Management Team

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