As we speculated in the Weekly Market Summary (please see here), the reaction to last Friday’s (2 April 2021) stunning US employment data has been positive with most of the major equity markets showing gains on the week (with equity markets closed on Friday and Monday for Easter, we had to wait until Tuesday to see how the market would react).
Sentiment has also been helped by the release of US ISM Services data, which came in at 63, its highest reading ever – and as we have previously stated, 50 is the line separating expansion and contraction, and so a reading of 63 clearly highlights the strengthening US economic recovery.
This strengthening was recognised by the IMF which increased its economic growth forecasts as the “way out of this health and economic crisis is increasingly visible”. The organisation now expects global GDP to expand by 6% this year (up from its 5.5% forecast made in January) – which is the strongest annual growth rate since the early 1970s. The IMF also increased its US growth estimate to 6.4% (up from 5.1%); China’s to 8.4% (from 8.1%); Eurozone to 4.4% (from 4.2%); and the UK to 5.3% (from 4.5%).
Given this improving economic backdrop, our eyes were focused on Wednesday’s (7 April 2021) release of the minutes from the last Fed monetary policy meeting, which was held on Wednesday 17 March 2021, to see the opinions of its policymakers.
On US inflation, policymakers remained resolute that the current uptick should be transitory.
And while policymakers noted the recent uptick in US economic data and the potential for pent-up demand helped by the recent $1.9tr fiscal stimulus package, policymakers were concerned about slack in the employment market – and as such concluded that the US economy is a long way from meeting the full employment part of its mandate.
This implies to us (which is contrary to the majority of economists), that the Fed is unlikely to tighten monetary policy anytime soon – and we believe that is positive for equity markets.
Investment Management Team