Week ending 7th May 2021.

If it was worth us stressing once, it is worth us repeating and repeating it ad nauseum:  an increase interest rates is many years away.

Our view, which is contrary to those herd-like economists and financial journalist, is based on the following facts; one, the approaching sharp increase in year-on-year inflation is simply transitory as last year’s distorted oil price passes through and as such will quickly fade; and two, we are in a period of economic recovery, not economic growth – and with unemployment levels far higher than before the coronavirus outbreak, this economic recovery, which is still in its infancy, needs to be supported by fiscal and monetary policies.

And after a shaky start to the week following the US Treasury Secretary and former Fed Chair, Janet Yellen’s, contradictory comments regarding an overheating economy (please see here), as you can see from the accompanying table, global equity markets rebounded and ended the week nicely higher.

This turnaround was helped by comments from the Bank of England (BoE) coupled with US economic data, both of which vindicated our long-held views.

The BoE kept UK interest rates unchanged and emphasised that policymakers weren’t in any rush to tighten monetary policy despite upgrading its forecasts for both GDP growth (from 5% to 7.25% for 2021) and inflation (from 2% to 2.5%).

Interestingly, the decision to continue with the existing bond purchase program (otherwise known as QE – quantitative easing) wasn’t unanimous – policymakers voted 8-1, as the BoE’s chief economist, Andy Haldane, dissented.  However, as he is stepping down next month, we would speculate that he was simply making headlines for himself to boost his appeal (and fee) for after-dinner speaking!

As for this week’s economic data, all was very positive except for US employment:  employment growth came in at just 266,000 in April versus economists’ expectations of a 1m gain – a clear sign that they had become complacent about the strength of the economic recovery.  Additionally, the previous month’s employment growth was revised lower by 146,000.  Consequently, the US unemployment rate rose to 6.1%.

While this obviously isn’t good for those unemployed Americans (there are now just over 8.2m more American unemployed than there were in February 2020), it clearly highlights the need for continued economic stimulus and low interest rates – which is very positive for global equity markets.

Looking ahead to this coming week, our main focus will be the market’s reaction to the US CPI inflation reading.  Headline inflation could easily match levels seen a decade ago of around 3.5%, but the more important core level (which excludes volatile items such as food and energy) is likely to come in not too far from the Fed’s 2% target.

Elsewhere we have UK Q1 GDP; US, UK and Eurozone industrial production; and US retail sales.

Investment Management Team