Markets reset as Fed shifts tone on monetary policy

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The grand reset of markets continued today as investors digested a shift in tone from the Federal Reserve and indications that a rise in US interest rates could come sooner than expected.

A successful vaccination programme, government support and the reopening of businesses enabled the Fed chair Jay Powell to confirm the bank was “talking-about-talking-about tapering” its emergency bond-buying programme as it raised expectations for inflation and unveiled improved forecasts for growth and employment.

The Fed now expects 7 per cent growth this year and 3.3 per cent in 2022, with the unemployment rate falling to 3.8 per cent by the end of next year. At least two rate rises are projected for 2023 but, according to James Bullard of the St Louis Fed in comments on Friday, these could even begin late next year.

The prospect of the Fed raising rates to counter inflation earlier than expected was a big setback for investors betting on the “reflation trade”. Assets such as value stocks, commodities and gold all fell, while those that benefit from disinflationary pressures, such as long-term US Treasuries and highly rated corporate bonds, all rose. The US dollar was set for its best week since September last year.

The FT Editorial Board praised the Fed for deftly communicating its new position, given that the long-term effect of the pandemic was still not entirely clear, or as Powell put it, “forecasters have a lot to be humble about; it’s a highly uncertain business.”

“Powell has already demonstrated his ability for fancy footwork,” the FT concluded. “That is encouraging: he is likely to need it again.”

Global economy

The CBI said the UK economy could recover growth lost to the pandemic a year earlier than it had originally forecast. The business lobby group said consumer spending, “the linchpin of recovery”, could drive GDP growth of 8.2 per cent this year and a further 6.1 per cent in 2022 after 2020’s plunge of 9.9 per cent.

Norway looks like it could be the first large western country in the new era to tighten monetary policy, as its central bank flagged an interest rate rise in September. The country, which contracted less than most other European nations during the pandemic, is recovering faster than expected as vaccinations increase.

Brazil raised interest rates for the third time this year to 4.25 per cent as Latin America’s largest economy sought to curb rising inflation. Although the economy is showing signs of progress, President Jair Bolsonaro is being battered by an official inquiry into his handling of the pandemic.

Business

The EU lost its legal attempt to force AstraZeneca to deliver more doses of its Covid-19 vaccines or face large fines. Both sides however claimed the verdict from a Brussels judge as a win, with AstraZeneca saying it was pleased with the court order, and the European Commission saying it confirmed its position that the company did not live up to its commitments.

Sales growth at Tesco, the UK’s largest food retailer, slowed in the three months to the end of May but the group was buttressed by a good performance at wholesale business Booker, which benefited from the reopening of the hospitality industry. Separately, official data showed UK retail sales falling back last month as consumers spent less in supermarkets and more in bars and restaurants.

Malaysia’s Top Glove, the world’s biggest rubber glove maker, has crashed back down to earth after benefiting from the huge demand for personal protection equipment during the pandemic. Sales have been hit not only by successful vaccine rollouts but also by a US import ban following allegations the company had used forced labour.

Markets

Jens Weidmann, head of Germany’s Bundesbank, said the European Central Bank should end its pandemic bond-buying programme “in the coming year”. ECB president Christine Lagarde just last week said it was “premature” to talk of winding down the scheme.

Robert Armstrong in his Unhedged newsletter discusses the reasons why lumber prices, turbocharged by the post-pandemic rush to build new homes and improve existing ones, are starting to fall back. The spike, he concludes, “looks like a Covid-specific phenomenon that is now abating, rather than the result of the fiscal and monetary policies that have people worried about persistent inflation.”

What should investors and savers do about the threat of rising inflation? The only really successful way to protect yourself, says personal finance and investment commentator Merryn Somerset Webb, is to try and make your income match the threat: demand a pay rise

Have your say

AdamC comments on Global banks adopt markedly different back-to-work policies:

I think there needs to be more thinking across the board about how hybrid models of (office) working will affect the layout and function of physical offices, and the amount of space needed. For example, HSBC is likely to find that the benefits of members of particular teams being in the office on the same days — coupled with the preference of many to attend on-site on midweek days — will militate against actually cutting office space overall.

Likewise, office design will need to better accommodate hybrid in-person and online meetings, which means more meeting rooms with videoconference facilities that can accommodate video call apps. (But you could probably get away with fewer desks, because people will do more desk-based work from home.) Ultimately, there is no point in people coming to the office to spend much of their time taking video calls at a desk, trying to be extra quiet and missing both the comforts of home and the physical presence of colleagues.

Final thought

Elon Musk is revolutionising the market for electric cars at the same time as pursuing the much less environmentally sound business of space travel. He’s also a fan of energy-intensive cryptocurrencies. So is he a green hero or villain? Watch our new film to find out.

Video: Elon Musk: CO2 saint or sinner? | FT Film

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