International Communique No. 304 – 31st August 2021
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PLENTY OF FOOD FOR THOUGHT
Over the past week, financial markets had to crunch numbers relating to the progressing delta variant and come to terms with increased global political risks linked to the Afghan crisis. But the speech by Fed boss Jerome Powell at the annual Jackson Hole symposium was mainly awaited (which took place over the internet). The major concern – amid the lofty equity valuations – was the future of central banks’ monetary stimulus plans. In the end, response to the news was positive and the main stock market indices are ending August with gains, in a month characterised by a much lower trading volume than usual. The S&P 500 is up 1.5%, long-term yields are down moderately and the dollar has lost ground, all after Powell’s tone was widely interpreted as dovish. Gold was up by only 0.6% over the week, showing majority are still firmly ‘risk on’.
Powell’s speech entitled Monetary Policy in the Time of COVID, highlighted that the US economy had made substantial progress towards the FOMC’s monetary policy objectives. That means that ‘tapering’ of the Fed’s purchases of bond and mortgage-backed assets (currently USD 120 billion per month) could happen as early as H2 2021, if the economy evolves as expected. However, no date was revealed, only stating that the move could be delayed by risks arising from the rapidly spreading delta variant. It became clear that tightening monetary policy immediately could throw a spanner in the works. It was also stated that no automatic link existed between tapering and increased short-term interest rates. So there is no urgency to raise them, it was said.
The August jobs report is expected to show another strong month, with 700,000 jobs creations forecast. Yet in July, there were still 8.7 million unemployed in the US, of which 2.9 million were classified as de facto ‘permanent losers’. It is amongst these disadvantaged workers that the Fed wants to see some improvement before it halts asset purchases and raises short-term interest rates. It is therefore by no means certain that the Fed will announce tapering at its meeting on 20-21 September.
US GDP growth for the second quarter of 2021 is estimated at an annualised 6.6%. The reopening of the economy, driven by vaccination and billions of dollars handed out to households, has stimulated consumer spending. As such, GDP has reverted to its pre-pandemic level. However, indicators from July point to a slowdown, as the rise in the delta variant has dampened confidence. The recovery in Covid-sensitive activities has ground to a standstill, as has credit-card spending. The drop in the expectations component of the confidence index suggests lower consumer spending and could potentially pin down GDP growth in the third quarter.
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