International Communique No. 306 – 14th September 2021


The main equity market indices looked gloomy, with many spooked by the spreading delta variant, supply-side inflation and increasing macroeconomic risk at a global level. Most were flummoxed by the monetary policy outlook.

Devoid of a new catalyst, equity markets are showing signs of running out of steam. However, corporate earnings forecasts are at record levels, leaving little room for upsets. Besides, current multiples urge for increased caution.

The direction of the monetary policy is still unclear.

One could say three peaks have been attained. Firstly, it is seemingly the end of the road for ultra-loose monetary policy, particularly if the Fed tapers its quantitative stimulus. Then there is the issue of fiscal policy. Exchequers in the US and Europe are out of ammunition. It moreover remains to be seen just how successful the massive spending plans have been. Finally, global GDP growth has probably peaked too.

The threat is that central banks will go ahead and reduce liquidity flows while the global economy is showing signs of faltering. Major US investment banks have begun to cut their 2021 growth forecasts for the US. In contrast, consumer spending is being supported by the sharp improvement in hiring and wage trends.

Households have large backlogs of savings and this is set to have a positive impact on consumption. On the production side, accelerated automation is boosting productivity, serving as another growth driver.

Despite cloudier skies ahead, corporate earnings forecasts are still at record levels. At its September meeting, the ECB reassured markets by opting for a moderately lower pace of asset purchases under its pandemic emergency programme. Purchases will be cut from EUR 80 billion per month to EUR 60-70 billion per month. This is not ‘tapering’, insisted Christine Lagarde, but rather ‘recalibration’.

The strong economic recovery reduces the need for emergency support. Poor US job creation figures for August could delay the Fed’s announcement for starting tapering when it next meets this month.

The Fed is expected to instead set the timetable for reducing bond and mortgage-backed asset purchases in November (currently USD 120 billion per month).

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