Market Update

The highlight of this week was undoubtedly the Federal Reserve's monetary policy meeting on Wednesday, July 28, 2021. Given the recent contradictory statements from various individual Fed policymakers, market watchers were closely scrutinizing the meeting's statement and the accompanying press conference, seeking clues and subtle shifts in language related to growth and inflation. These hints would help discern when the central bank might commence tightening its monetary policy.
Regarding inflation, we have consistently emphasized in these Market Summaries that a significant inflation spike is almost certain due to distortions resulting from last year's pandemic-related disruptions and abrupt lockdowns, coupled with current supply constraints associated with the economic reopening. We have maintained that these elevated inflation readings would be transitory as these distortions work their way through the system, rather than heralding a sustained period of high inflation.
To our relief, Federal Reserve Chair Jay Powell echoed our sentiments by downplaying the recent high inflation readings, asserting that inflationary pressures were confined to specific sectors and should begin to abate in the coming months.
The notable change in the meeting's statement was the omission of the word "substantial" in reference to the desired level of further economic progress, reflecting the recent robust economic data. However, during the accompanying press conference, Jay Powell used the term several times when discussing the employment market.
Given that the Fed operates under a dual mandate encompassing both inflation and employment, this indicates that while the US economy may be inching closer to justifying a tapering of its quantitative easing (QE) program, it is a cautious step. The Fed's primary focus remains squarely on facilitating the recovery of the employment market.
Furthermore, Jay Powell mentioned that discussions about tapering QE would occur during "coming meetings." This strongly suggests that any announcement of tapering plans is unlikely to materialize until the earliest meetings in November or December. Consequently, we continue to believe that the Federal Reserve is far from considering an interest rate hike, which is favorable for global equity markets.
Given the Fed's clear emphasis on the US employment market, the upcoming Friday, August 6, 2021, will be pivotal, with key data releases covering non-farm payrolls, the unemployment rate, the participation rate, and average earnings.
Additionally, other significant data releases in the week ahead include US ISM and factory orders, Chinese PMI, and import/export data, as well as Eurozone retail sales.