Market Update

Global equity markets experienced a positive week, primarily driven by favorable corporate earnings, which we discussed in our previous market update. Additionally, there were positive economic updates toward the end of the week that further boosted market sentiment.
On Thursday, August 5, 2021, the Bank of England (BoE) conducted its monetary policy meeting and released its quarterly monetary policy report, revealing several noteworthy developments. While the committee opted to maintain interest rates at 0.1% and quantitative easing (QE) at £895 billion, the report contained significant insights.
Regarding forecasts, the BoE now anticipates that Consumer Price Index (CPI) inflation will reach its peak at 4% in the fourth quarter of this year, which is 1.5% higher than the May forecast. This adjustment is attributed to "developments in energy and other goods prices." Nevertheless, the bank reiterated our view that this inflationary spike is transitory, and they anticipate it will gradually return to near their 2% target once it peaks. Although economic growth forecasts for the third quarter were slightly tempered due to recent COVID-19 developments, the BoE expects GDP to continue recovering throughout the rest of the year and reach pre-pandemic levels in the fourth quarter. Notably, they revised their estimate for the peak in unemployment, now believing it has already occurred.
In addition to updated forecasts, the BoE's communication shifted tone significantly. Despite consistently stating they had no intentions of tightening policy, they now signal an impending need for "modest tightening" of monetary policy in the coming years. Given the market volatility witnessed during the US Fed's "taper tantrum" of 2013, the BoE aims to avoid any disorderly withdrawal of economic support. Notably, they stated that they would not begin unwinding QE until the interest rate reaches 0.5%. As a result, we interpret this update as a reminder that support measures will eventually come to an end, with market reactions remaining relatively muted in equity, bond, and foreign exchange markets.
On Friday, August 6, 2021, the US labor market provided several encouraging updates. US nonfarm payroll data indicated the addition of 943,000 jobs in July, surpassing expectations of 858,000. This growth was primarily attributed to gains in the hospitality and leisure sector, although other sectors also experienced substantial increases. Furthermore, last month's payroll data was revised upward from 850,000 to 938,000.
The unemployment rate declined from 5.9% to 5.4%, beating expectations of 5.7%. Additionally, the labor force participation rate remained at 61.7%, aligning with expectations and slightly improving compared to June. The decline in unemployment coupled with an uptick in the participation rate is an encouraging sign, as it suggests that the reduction in unemployment was not solely due to individuals exiting the workforce.
The robust jobs report has led to speculation about when the Federal Reserve (Fed) might begin tapering its support measures. While the Fed is likely to acknowledge the strong employment report, with payrolls still significantly below their peak from last year, we anticipate that the Fed will require more evidence of substantial progress before taking action.
Looking ahead to next week, economic data releases will be relatively sparse, with corporate earnings reports continuing to dominate headlines as we enter the latter part of the first-half earnings season.