Market Update

We were already anxiously awaiting the policy meetings at major central banks, but the week's conclusion was made even more exhausting by heightened geopolitical tensions, fresh coronavirus lockdowns in Europe, and a weaker oil price.
As we mentioned last week, with all the recent buzz surrounding expectations of resurgent inflation and, consequently, higher interest rates, we closely scrutinized this week's central bank statements from the Federal Reserve (Fed), Bank of England (BoE), and Bank of Japan (BoJ).
At first glance, the Fed struck a very dovish tone: it upgraded its economic growth forecasts (projecting 6.5% for 2021, 3.3% for 2022, and 2.2% for 2023); anticipated a sharp decline in unemployment (4.5% for 2021, 3.9% for 2022, and 3.5% for 2023); and expected core Consumer Price Index (CPI) inflation to hover around its 2% target (2.2% for 2021, 2% for 2022, and 2.1% for 2023).
Moreover, Fed Chair Jay Powell not only emphasized that a transitory uptick in inflation won't trigger interest rate hikes but also stated that the central bank won't base its actions on forecasts. Instead, it will wait for concrete data to confirm that the economy has achieved its dual goals of 2% inflation and full employment before considering monetary policy tightening. Consequently, the Fed indicated that US interest rates would remain unchanged until at least 2024.
However, upon closer examination of the Fed's "dot-plot" (illustrating each policymaker's interest rate projections for the next three years), it became apparent that four of the 18 policymakers anticipate an interest rate increase next year, while seven of the 18 foresee at least one increase in 2023. This suggests that they anticipate a stronger recovery.
Although we recognize that the US economy is indeed improving, we believe that a full recovery will take more than a year or two. It took nearly a decade to recover from the 2008/2009 global financial crisis. Additionally, this week's jobless claims data indicated a slowdown in labor market recovery. If unemployment levels persist well above pre-coronavirus levels, economic slack will remain high, limiting wage growth and, consequently, inflation.
Unfortunately, this dot-plot forecast may imply that the ongoing tug of war between economic stimulus and economic reopening on one side and rising inflation and interest rates on the other will persist. This, in turn, could result in occasional periods of mispricing and volatility in both bond and equity markets.
Nevertheless, overall, the Fed's statement was largely positive for equity markets, as it suggests that the majority of policymakers have learned from past mistakes of prematurely raising interest rates based on overly optimistic growth and inflation forecasts.
The Bank of England conveyed a similar message. However, what caught our attention was the complete absence of any mention of negative interest rates.
Negative interest rates were the primary focus of last month's BoE meeting, and we had hoped that with Mark Carney no longer serving as the BoE Governor, the inconsistent messaging from the BoE would cease. What has transpired in the past month to warrant not even a mention of negative interest rates?
While we fully acknowledge that Joe Biden's $1.9 trillion US fiscal stimulus package was passed this month, it became almost a foregone conclusion as soon as the Democrats assumed control of both houses of Congress and the White House in January. Moreover, the UK is still grappling with new Brexit rules and fresh lockdown restrictions across Europe.
Furthermore, this week witnessed a more than 7% decline in the price of a barrel of Brent oil due to a combination of European lockdowns, a pessimistic outlook from the International Energy Agency (IEA), and news of China purchasing record amounts of Iranian oil. A lower oil price will help alleviate inflationary pressures.
Looking ahead to the coming week, we have PMI data for the US, UK, and Eurozone; UK employment data (including the unemployment rate and weekly earnings); UK Consumer Price Index (CPI) inflation; UK retail sales figures; weekly US jobless claims; the Chicago Fed National Activity Index; US durable goods orders; and the Fed's preferred inflation measure, the Personal Consumption Expenditures (PCE) index, on the docket.