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LGT Navigator: Federal Reserve launches tapering debate

July 29, 2021

The Federal Reserve is sticking to its expansionary monetary policy for the time being. However, the Fed board also said that the economy has recovered in recent months and Federal Reserve Chairman Jerome Powell confirmed that there had been initial discussions about how a possible withdrawal from securities purchases might look like. In the wrangling over the fiscal package that US President Joe Biden has promised, the government has achieved an initial breakthrough.

Fed

US stock markets closed mixed on Wednesday and were ultimately unimpressed by the monetary policy decision of the Federal Reserve. The Dow Jones Industrial lost -0.4% to 34’930.93 points and the S&P 500 hardly moved (-0.02%, 4400.64 point). The Nasdaq 100, however, climbed +0.4% to 15’018.10 points. On Wall Street, the interest rate decision was only one note among many. Thus, the quarterly results of the tech giants Alphabet, Microsoft and Apple were in the spotlight, which convinced with their results.

On Thursday, Asian stock exchanges are recovering from the heavy losses in recent days. In Hong Kong, the Hang Seng climbs +3.3% and the Shanghai Composite advances +1.4%. In Tokyo, the Nikkei gains +0.7%. 

US monetary policy remains expansionary for the time being

The Federal Reserve is maintaining its expansionary monetary policy for the time being, as it announced on Wednesday in Washington. Thus, the target range for the Federal Reserve rate remains at 0 to 0.25%. However, the question of interest was which course the central bank will take in the future regarding its bond purchases. Here, too, the Fed wants to stick to the monthly purchase volume of USD 120 billion for the time being, which market observers had expected. However, the central bankers have adjusted the wording compared to the previous months. So far, the communiqué on the interest rate decision said that the Fed would continue the bond purchases until the economy has made substantial progress towards the central bank targets, namely low unemployment and an annual inflation rate of 2%. Now, the Fed noted, the economy has moved in the right direction since December and it will assess this progress at upcoming FOMC meetings.

The debate about a reduction in bond purchases (tapering) has thus been launched, and analysts expect that more concrete plans could follow by the end of the year. Fed Chairman Jerome Powell has acted cautiously so far and remained true to this line on Wednesday. He said the labor market was still far away from the employment target and that he hoped to see some more strong job numbers. Nevertheless, Powell said, the Fed board has talked about how a possible withdrawal from bond purchases could proceed. However, he reiterated once again that the Fed would signal a change of course early.

US Senate reaches agreement on infrastructure package

In the wrangling over the infrastructure package, US President Joe Biden can report a breakthrough. On Wednesday, senators from both parties and the government agreed on an infrastructure package worth around USD 1 trillion. Now the package must be approved by the Senate and the House of Representatives, with the government relying on Republican support. In addition to around USD 400 billion to be regularly renewed as part of the baseline budget, the package includes USD 550 billion in new spending. These funds are to flow into various projects over the next five years. Thus, around USD 110 billion is earmarked for the expansion and renovation of roads and bridges, just under USD 40 billion is to be spent on expanding public transport, and USD 66 billion is to go to the Amtrak rail company. In addition, electric mobility is to be promoted and the electricity infrastructure modernized with around USD 70 billion. A further USD 42 billion is earmarked for ports and airports. Where exactly the funds for the investments are to come from, however, remained rather vague in the White House communication.

Swiss economists are becoming more cautious

The mood of Swiss financial analysts deteriorated somewhat in July. The CS-CFA Index, which is compiled by the major bank Credit Suisse, fell by 8.5 points to 42.8. This puts it at the same level as last summer, before the outbreak of the second wave of the pandemic caused the barometer to plummet. At present, however, the index level still signals optimism despite growing concerns about the spread of the delta variant. The analysts surveyed expect economic growth in Switzerland to average +2.9% in the current year, followed by +2.3% in the coming year. The experts are skeptical above all with regard to the economic development of the eurozone and the US, which is likely to dampen Swiss export activity.

 

 

Economic Indicators July 29

MEZ Country Indicator Last period
09:55 GER Unemployment rate (m/m, July) -38'000
13:30 EZ ECB minutes 51.3
14:30 US Gross domestic product Q2 (q/q) +4.3%
16:00 US Pending home sales (m/m, June) +8.0%

 

Earnings Calender July 29

Country Company Period
FR Air Liquide Q2
US Amazon Q2
US AstraZeneca Q2
CH Clariant Q2
CH Credit Suisse Q2
FR Danone H1
IT Enel Q2
FR L'Oréal Q2
CH Nestlé Q2
KOR Samsung Q2
FR Sanofi Q2

 

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: David Wolf, +41 44 250 83 48, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

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