Week ending 25th June 2021.

After last week’s ‘dot plot’ shocker from the US central bank, all eyes were on this week’s UK monetary policy meeting and US PCE reading.

Thankfully, the Fed’s hawkishness was not endorsed by policymakers at the BoE, which left both interest rates and its asset-purchase (QE) target unchanged at £875bn.

Better still, policymakers were effectively all in agreement:  although the vote wasn’t unanimous, it was 8-1 as the outgoing Andy Haldane again dissented, but as he is leaving the BoE it is entirely possible that the vote becomes unanimous at the BoE’s next meeting on Thursday 5 August 2021.

And this voting margin tells us that policymakers thankfully aren’t in any rush to increase UK interest rates and therefore see the current inflation as transitory.  We believe that this is very positive (and sensible) given the uncertainties surrounding the unwinding of the job-retention (furlough) scheme in September (which may see unemployment rise); UK/EU trade tensions; and of course the current uptick in coronavirus infections.

As for the US PCE (the Fed’s preferred inflation measure), it was again inflated by base effects.  However, while the year-on-year increase was in line with economist expectations at 3.4%, the month-on-month increase surprised on the downside at 0.5% versus expectations of an increase of 0.6%.  In our opinion, this is extremely positive for global equity markets as it shows that inflation isn’t running out of control and an increase in US interest rates is a long way away – and as such (as you can see from the accompanying table), equity markets recovered last week’s losses.

Looking ahead, we have a relatively quiet economic calendar this week.  Of most interest will be Friday’s (2 July 2021) US unemployment data, which includes non-farm payrolls; unemployment rate; participation rate; and average earnings – especially as it comes ahead of a long Independence Day holiday weekend in the US.

Other data releases include:  US ISM (Institute for Supply Management); US & Eurozone consumer confidence; Eurozone CPI inflation; Japanese industrial production; and Chinese PMI (Purchasing Managers’ Index).  Additionally, we have an OPEC meeting – and with the price of a barrel of Brent currently just above pre-coronavirus levels at $75 due to recovering demand, the coalition may increase supplies which could help to contain inflationary worries.

Investment Management Team