Our focus yesterday evening (Wednesday 10 June 2020) was on the press conference from the Fed Chair, Jay Powell, for any hints on what the US central bank may do in the future following last Friday’s (5 June 2020) stunning employment data (when 2.5m jobs were added).
He acknowledged some of the points we have previously highlighted in these market updates, namely that Friday’s 13.3% unemployment reading could be understated by several percentage points (please see here) and that the coronavirus lockdowns have disproportionately hit the low paid and those that have jobs with a high risk of layoff, such as restaurants, hairdressers and retail (please see here).
However, Jay Powell delivered everything we wanted when he said: “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates”.
This was music to our ears – an absolutely perfect one-liner as it clearly highlights that the Fed is going to keep US monetary policy very loose for the foreseeable future.
In fact he pledged to maintain the Fed’s asset purchases at the present pace (which is $80bn a month for Treasuries and $40bn a month for mortgage-backed bonds) and projected US interest rates will stay near zero through 2022 as their preferred inflation measure, the core PCE, is likely to remain below their 2% target. Additionally, although he believes that US economy will contract by 6.5% this year before rebounding 5% next year, he stated that these were uncertain times as the coronavirus outbreak had caused the biggest economic shock in living memory.
Elsewhere, US CPI data yesterday showed both headline inflation and core inflation (which excludes volatile items such as food and energy) dropped 0.1% in May, taking the inflation rates down to 0.1% and 1.2% respectively – the smallest core increase since March 2011.
As we indicated yesterday, after the Chinese PPI data (please see here), there is a growing risk of deflation. However, we would caveat that the coronavirus lockdowns are drastically changing consumption patterns, making the current actual shopping basket look very different from the weightings given to the various items in a ‘normal’ shopping basket. For example, due to the lockdown restrictions Americans aren’t travelling as much (which resulted in airfares falling 4.9% and car insurance falling 8.9%) or buying as many clothes (2.9% cheaper) as they would normally, but they are buying more food for home consumption, which saw prices increase by 1% – and as a result, this all makes the reading slightly less representative of the prices American consumers are actually experiencing.
However, looking at the individual elements, it still suggests to us that US inflation is running well below the Fed’s 2% target – which provides us with additional confirmation that the Fed has to keep its monetary policy accommodating for the foreseeable future.
While this is all good news for global equity markets, we have also previously warned that the path for financial markets will not be smooth and that we fully expect market volatility will remain elevated in the short-term – and unfortunately equity markets have fallen this morning as focus has now turned to today’s US weekly jobless claims data and the potential risks of a second wave of coronavirus cases after the US announced that infections had passed the 2m mark. As we write, the FTSE-100 is down nearly 160 points, or 2.5%.
Investment Management Team