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LGT Navigator: Fed remains vague in the face of a high degree of uncertainty

July 8, 2021

The US Federal Reserve struck a cautiously positive tone in the minutes of the latest monetary policy decision published yesterday evening, assuming further progress in achieving its economic goals. Thus, the Fed seems to give the capital markets another signal of a monetary policy turnaround in the not-too-distant future but remains vague given the high uncertainty factor. On Wall Street, the indices subsequently posted slight gains, while the yield on ten-year US government bonds reached its lowest level since February.

Fed remains vague in the face of a high degree of uncertainty

After leaving its loose monetary policy unchanged at its last meeting in June, the Federal Reserve (Fed) appears to be preparing the financial markets for an end to its extremely expansionary stance and a turnaround on interest rates in 2023 in the face of rising inflation. In minutes released last night (Minutes) of the June 15-16 Federal Open Market Committee (FOMC) meeting, the Fed emphasized “substantial progress” in the economy's recovery from the corona crisis. Some Council members, then, believe that the conditions for a reduction in securities purchases may be met somewhat sooner than previously thought. However, it is still too early to make clear statements regarding future developments on the labor market and inflation.

On the US stock markets, the indices posted moderate gains at midweek. The Dow Jones Industrial closed +0.3% higher at 34,681.79 points. The S&P 500 continues to trade at record levels and exited the day with a gain of +0.34% at 4'358.13 points. On the Nasdaq technology exchange, the momentum weakened somewhat on Wednesday and the Nasdaq 100 ended the day at 14'810.53 points (+0.16%). In Asia, most equity indices trended in negative territory, while in the bond market, the yield on ten-year US Treasury bonds stabilized around 1.30%.

Brussels executive shows more confidence in its economic forecasts

The EU Commission has raised its growth forecasts for the euro economy and now expects the pre-crisis level to be reached as early as the final quarter of this year. In the current year, the executive authority now expects a GDP growth rate of +4.8% instead of the previously estimated +4.3%. Next year, economic growth in the euro zone is then expected to lose some momentum and still expand by +4.5% (previously +4.4%). The recovery from the Corona crisis, which is expected to be faster than initially assumed, is primarily due to the advancing vaccination campaigns and the associated steps towards greater openness. At the same time, however, the EU Commission also expects inflation to be somewhat higher. Consumer price inflation is expected to average +2.2% this year, compared with the previous forecast of +1.9%. However, a slowdown to an average of +1.6% is expected as early as 2022. 

IMF warns of inflation risks and earlier than expected rise in interest rates

Against the backdrop of expansionary fiscal policy, particularly in the US, the International Monetary Fund (IMF) is warning of rising inflationary pressure and the risk of an earlier than anticipated tightening of monetary policy. According to IMF President Kristalina Georgieva, this could also lead to a tightening of global financial conditions and significant capital outflows from emerging and developing countries. Overall, the global economic outlook remains fraught with high uncertainties and the rise in inflation could prove more “persistent” than expected.

Economic Indicators July 8

MEZ Country Indicator Last period
07:45 SZ Unemployment Rate (May) 3.0%
08:00 GE Exports (May, m/m) +0.3%
08:00 GE Imports (May, m/m) -1.75
14:30 US Initial Jobless Claims (weekly)  364,000

 

Earnings Calender July 13

Country Company Period
AUT Telekom Austria Q2 
US JPMorgan Chase Q2
US Goldman Sachs Q2
US PepsiCo Q2

 

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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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