Market Update

In light of President Joe Biden's signing of the $1.9 trillion fiscal stimulus bill into law on Thursday, March 11, 2021, which means that eligible Americans (individuals earning less than $75,000 or married couples earning less than $150,000) will soon begin receiving their $1,400 cash payments, coupled with his commitment to have all Americans vaccinated by May, the focus of the week once again revolved around inflation and interest rates.
At first glance, with the prospect of an economic reopening on the horizon, it might seem reasonable to assume that these $1,400 payments could usher in a period of elevated inflation, prompting the Federal Reserve (as well as other central banks worldwide) to consider raising interest rates. However, we believe that the market is getting ahead of itself.
For one, despite the pent-up demand awaiting release as lockdown restrictions ease, it's more likely that most eligible Americans will use their $1,400 payments for practical purposes like covering their mortgage, bills, or reducing their debt, rather than indulging in exotic holidays or extravagant purchases.
Secondly, although we anticipate a swift economic rebound, there will still be significant economic slack, as unemployment levels are likely to remain above pre-coronavirus levels for an extended period. This will curtail wage growth. Furthermore, it's worth noting that even if employment levels were to return to pre-coronavirus levels immediately, those levels of employment did not trigger runaway inflation.
Lastly, as we've previously emphasized in these Market Summaries, except for the year-on-year effect of last year's distorted oil prices in the coming months, which will temporarily push headline Consumer Price Index (CPI) inflation above 2%, global inflationary pressures remain subdued. Consequently, higher interest rates are still years away.
In fact, we believe that the subdued inflationary pressures were underscored in Wednesday's (March 10, 2021) US CPI data. While the headline inflation rate rose to 1.7% from 1.4%, the core rate (excluding volatile items like food and energy) actually dropped to 1.3% from 1.4%.
Additionally, following the European Central Bank's monetary policy meeting, policymakers indicated that the market is prematurely anticipating higher interest rates, stating that Eurozone interest rates will remain "at present or lower levels until inflation is near their [2%] goal."
In the UK, the economy contracted by 2.9% in January. While this figure outperformed the major economists' expectation of a 4.9% contraction, it was not surprising to us. As anticipated, the lockdown restrictions on the retail and hospitality sectors resulted in a contraction. However, other sectors within the economy have adapted well to the lockdowns and have not been as affected as they were during the initial lockdown last year. Furthermore, the UK's vaccination program has contributed to improving consumer and business sentiment.
Looking ahead to the upcoming week, our focus will be on the monetary policy meetings at the Federal Reserve, Bank of England, and Bank of Japan, given the current market speculation regarding higher inflation and interest rates.
Additionally, we will monitor US and Chinese retail sales, US and Chinese industrial production, US housing data, and the weekly US jobless claims.