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LGT Navigator: The Fed remains true to its course

March 18, 2021

As expected, the Federal Reserve left key interest rates at record lows and intends to continue supporting the economy with an extremely loose monetary policy. Fed Chairman Powell stressed that, despite positive economic signals, it was currently too early to consider an exit. At the same time, Powell did not elaborate specifically on developments in the bond market. On stock exchanges, the decision was received positively. However, the prospect of continued low interest rates could once again strengthen inflation expectations and lead to an even steeper yield curve on the bond market. While Brazil's central bank raised interest rates, the focus today is still on the interest rate decisions of the Bank of Japan, the Bank of England and the Turkish central bank.

The Fed remains true to its course

At yesterday's policy decision, the Federal Open Market Committee (FOMC) of the Federal Reserve (Fed) unanimously signaled that it will stick to its current course in order to contain the consequences of the corona pandemic and to lead the economy out of the crisis. This means that not only will the key interest rate remain at the zero line, but the billions of dollars in securities purchases will also continue. Currently, the Fed buys USD 80bn in government bonds and USD 40bn in mortgage-backed securities each month. In its economic outlook, however, the Fed was somewhat more confident. For example, indicators of economic activity and employment have improved recently, but the hardest-hit sectors remain weak, the central bank stressed. However, Fed Chairman Powell did not specifically address the recently observed rise in US government bond yields due to increased inflation expectations. On the other hand, the Fed president emphasized that it is currently too early for a discussion on curbing bond purchases and that we are still far away from the targeted goals for employment and price development.

On the New York Stock Exchange, the prospect of a continued longer-term extremely loose monetary policy of the Fed was positively received and the indices continued in part their record chase. The Dow Jones Industrial closed +0.58% higher at 33'015.37 points and the S&P 500 gained +0.29% to 3'974.12 points. The technology selection index Nasdaq 100 ended Wednesday with a daily gain of +0.38% at 13'202.38 points after initial losses of up to -1.5%. On the stock exchanges in Asia, most indices followed the positive guidance from the US and futures also signal a positive start to the day for the European stock markets.

Eurozone inflation rate remains stable in February

The rate of consumer price inflation in the euro area remained unchanged in February. Compared to a year ago, the cost of living thus increased by +0.9% last month, as confirmed by the statistics office Eurostat. Compared to the previous month, consumer prices rose by +0.2% on average. Inflation was dampened by a decline in energy prices and a weaker increase in food prices. The core inflation rate, i.e. excluding energy and food, thus declined from +1.4% in January to +1.1% in February. This means that the European Central Bank's (ECB) inflation target of just under two percent in the medium term is still clearly missed, although analysts expect inflationary pressure to increase at least temporarily during the year.

S&P's confirms rating of the USA

The rating agency Standard & Poor's (S&P) confirmed the credit rating for the US at AA+ and the outlook for the rating is also still classified as “stable”. According to S&P, the negative and positive factors in the credit rating assessment will balance out over the next three years. The US economy will quickly recover this year and next year, after the end of the corona crisis, benefiting from massive fiscal and monetary support, it said. The US could continue to build on the strength of its institutions, diversified and resilient economy, a high degree of monetary policy flexibility, and its status as the issuer of the world's most important reserve currency. Nevertheless, S&P is the only one of the major rating agencies that does not give the US its top AAA rating.

German economic “wise men” lower economic forecasts

In forecasts presented yesterday, the German Council of Economic Experts is somewhat more cautious about expected economic growth in Germany. Against the backdrop of the ongoing corona crisis, the “Wirtschaftsweisen” lowered their economic forecast for 2021 to +3.1%. In November, GDP growth of +3.7% was still forecast. In the first quarter, economic output is now expected to decline by around -2%. However, thanks to the ongoing vaccination campaign and the anticipated gradual easing, a recovery is expected during the year. After last year's -4.9% slump, the economic experts expect a growth rate of +3% for 2021 as a whole and forecast +4% growth for 2022.

 

Economic Indicators March 18

MEZ Country Indicator Last
05:00 JP Bank of Japan Monetary Policy Decision -0.1%
11:00 EZ Trade Balance (February) +EUR 29.2bn
13:00 UK Bank of England Monetary Policy Decision +0.1%
13:30 US Initial Jobless Claims (weekly) 712,000
13:30 US Philly Fed Manufacturing Index (March) +39.5
15:00 US Leading Indicator (Februar, m/m) +0.5%

Earnings Calendr March 18

Country Corporate Period
SZ Swatch Balance Sheet Press Conference
GE HeidelbergCement Annual Figures
US Nike Q4

 

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, +41 44 250 78 59, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

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