US equity markets yesterday reversed Tuesday’s (19 May 2020) late sell-off, with the Dow Jones ending the day up 369 points, or 1.52%, while the broader S&P 500 index climbed 1.67%, after the Fed released minutes from its last monetary policy meeting (28-29 April 2020).
Minutes showed that officials were concerned about the risks to financial stability as a result of the coronavirus outbreak, the potential for a second wave and the lasting damage to the economy – which clearly suggests to us that the Fed will keep its liquidity floodgates wide open for the foreseeable future. Interestingly, there was also a discussion around clarifying forward guidance either by date or an outcome.
Forward guidance is an attempt to manage public expectations on future interest rates (the theory is that this should allow people to plan better, businesses to expand and economic activity to grow) and is a blast from the past, as both the Fed and the BoE used that shortly after the global financial crisis in 2008/9, with mixed results.
For example, back in August 2013, the then Governor of the BoE, Mark Carney said that interest rates would start to rise when unemployment fell to 7% (at the time unemployment was 7.7%) and then in June 2014, Mark Carney implied that an interest rate rise was imminent (unemployment was then 6.3%). However the BoE didn’t increase interest rates. Then in July 2015, Mark Carney said that UK interest rates would rise at the turn of that year – they didn’t. In fact, interest rates were not increased at all over the period and were then cut in 2016 – as inflation was just 0.5% (and unemployment was 4.9%)!
This morning the FTSE-100 is currently down around 50 points (0.82%) as we await the weekly US jobless claims data (due this afternoon).
Elsewhere, there wasn’t much to glean from today’s UK and Eurozone PMI (Purchasing Managers’ Index) data. Although the data was encouraging, as it showed both services and manufacturing has started to recover from April’s record lows (especially as the lockdown restrictions are only just being eased), they all continued to indicate a depressed level of activity. For example, while the UK’s Manufacturing PMI reading improved to 40.6 in May from 32.6 in April, it remained below 50 (50 is the line separating expansion and contraction, so a reading below 50 signals the UK economy is contracting).
Investment Management Team