Volatile Week

A VOLATILE WEEK IN MARKETS Markets have continued to fluctuate sharply this week. Equities started with a sizable sell-off but have subsequently rallied and in Europe and possibly in the US seem set to end up on the week. In bond markets, the sharp fall in yields seen of late initially continued with longer-dated yields in both the UK and US their low est levels since February. Yields have subsequently backed up but are still well below their levels of a few weeks ago. Currency markets have been less volatile but the US dollar is still close to its highest since April against both the euro and sterling. Recent market moves seem to suggest that concerns about a slowing in economic growth have again come to the forefront. This w eek’s initial equity sell-off seemed to at least partly reflect concerns about recent rises in Covid cases, while the rebound seemed to be helped by better-than-expected corporate earnings data. In contrast, concerns about rising inflation and a consequent earlier-than-expected tightening in monetary policy seem to have moved to the back burner. However, a continued rise in inflation indicators suggests that those concerns could still return.

MIXED MESSAGES FROM BOE SPEAKERS

The Bank of England w ill give its ow n policy update on 5th August. Expectations for that meeting have been fluctuating. Last w eek, relatively hawkish comments from a couple of Monetary Policy Committee members prompted speculation about an earlier than previously expected end to the BoE’s asset purchase programme and led markets to bring forward their expectations for a first Bank rate hike to early 2022. However, this w eek, comments from two other MPC members, Haskel & Deputy Governor Broadbent appeared to indicate that neither is ready to vote for a near-term change in policy. External MPC member Vlieighe, who will leave the Committee at the end of next month, is scheduled to speak on Monday but it looks like he w ill not talk primarily about the immediate policy environment. After that, we are not currently scheduled to hear from any other BoE policymakers before they head into their pre-meeting quiet period.

FED’S MESSAGE TO BE LARGELY UNCHANGED

Next week’s key event for markets is likely to be Wednesday’s policy update from the US Federal Reserve. Its last meeting in June produced some changes to the Fed’s message. The ongoing rise in inflationary pressures w as still seen as probably a ‘transitory’ impact of the restarting of the economy as restrictions eased but nevertheless upside risks w ere acknowledged. Fed Chair Pow ell also said it might soon be time to start talking about tapering the Fed’s asset purchase programme. Finally Fed policymakers’ interest rate projections (the so called ‘dot plot’) suggested that a majority expected two interest rises by the end of 2023 and a size-able minority thought they may even need to rise in 2022. Those messages w ere initially perceived as more ‘hawkish’ than expected by markets. How ever, as has been noted earlier longer-dated Treasury yields have fallen back. The present meeting takes place against a background of ongoing uncertainty. On the one hand, inflation indicators have continued to go up. But on the other, rising Covid-19 cases globally, and to a lesser extent in the US, are raising concerns that the economy’s recovery may yet falter. Against that background the majority of Fed policymakers w ill probably not w ant to do anything new . How ever, as annual CPI inflation has recently hit a 30-year high it seems unlikely that the Fed w ill backtrack on w hat w as said last time even if most still believe that the pressures are temporary. So the key message is likely to be that they are in wait-and-see mode as they monitor developments and that in the meantime monetary policy w ill remain highly accommodative. This is not one of the meetings w hen the Fed issues new forecasts so there w ill be no new ‘dot plot’. How ever, Fed Chair Pow ell w ill as usual hold a press conference. He may use that to say that the Committee has now started to talk about w hen they should taper QE but seems unlikely to provide further detail at this point.

US AND EUROZONE GDP TO RISE

The coming w eek’s data calendar is very light in the UK but busy elsew here. In the US, Q2 GDP data (Thu) are expected to post an annualised rise of around 9%. That would be the fourth consecutive quarterly increase following the drop in the second quarter of last year and would mean that GDP was now more than 2% above its pre-pandemic level. However, the data won’t necessarily provide any new insight into whether the momentum of the recovery w ill be maintained in the second half of the year. The consumer spending update for June (Fri) will show the trajectory of spending by the end of the quarter as service activity continued to open up. That report w ill also contain the June reading for the Fed’s preferred inflation measure (the consumer expenditure deflator) which is expected to have posted its highest annual reading for around 30 years at 4.1%. In the Eurozone, Q2 GDP is forecast to rise by 1.5%, which would be the first increase for three quarters. Timelier indicators currently suggest that the rebound has accelerated further in the early part of Q3. Eurozone annual CPI headline inflation for July is expected to be unchanged from June at 1.9%, while the core rate is predicted to fall further to 0.5%. Those outcomes would reaffirm the message coming from this w eek’s European Central Bank update that monetary policy in the region is set to remain highly accommodative.

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