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WeekWatch -‘US stocks rose last week, after dovish overtures from Federal Reserve officials’ June 2021

WeekWatch -‘US stocks rose last week, after dovish overtures from Federal Reserve officials’ June 2021

US stocks rose last week, after dovish overtures from Federal Reserve officials and the Biden administration secured bipartisan support for a $1 trillion infrastructure deal on Thursday.

Prior to this, there had been some volatility in US markets, following last week’s announcement that an interest rate rise was projected in 2023, a year earlier than in prior forecasts.

US Federal Reserve officials eventually managed to reassure investors that any moves to tighten fiscal policies would only happen if economic data called for it, and the fact it was even being suggested was the result of stronger-than-expected data on the recovery, leading to prices recovering.

Prices continued to improve following the infrastructure deal agreement, which will fund areas including transport, as well as broadband and energy improvements. The Nasdaq and S&P 500 both spiked immediately following the announcement, and ended Thursday at record highs, while the Dow Jones also increased over the week.

Given the importance of the US, it’s unsurprising that events there have affected other markets. Ruth Gregory, Senior UK Economist at Capital Economics, pointed out that: “The evolving outlook for monetary policy on the other side of the Atlantic has once again been partly to blame for recent movements in UK markets. Like in the US, the yield curve flattened after the Fed became more hawkish at its May meeting, although these moves have since unwound.”

The past week also saw the UK’s Bank of England (BoE) vote to hold interest rates at their historic low and continue its existing programme of UK bond purchases.

However, although the BoE noted inflation had risen to 2.1% – above its 2% target – and GDP growth had strengthened, it said it expected these changes to be temporary, and anticipated both to fall back in the future.

Striking a more dovish tone, the BoE said that it does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare employment capacity, and achieving the 2% inflation target sustainably.

With the BoE seemingly in no rush to shift its policy, the news was accompanied by a fall in sterling against the dollar, as well as a rise in the FTSE 100, which ended the week up compared to the start of the week.

David Page, Head of Macro Research at AXA Investment Managers, noted: “Our longer-term assessment is that UK GDP growth will be a little softer than the BoE expects. We forecast 6.8% now versus BoE forecasts of 7.25% in May and that inflation will fall back a little more than the BoE expected: we forecast above 1.5% by end next year, rather than around 2%.

“Accordingly, we suspect that the BoE will take slightly longer to tighten monetary policy than current expectations, which rose after last week’s Fed meeting. We forecast a rise to 0.25% in August 2023.”

The STOXX Europe 600 ended the week broadly where it started. Investors will look to further economic data due out in the coming weeks, including the Economic Sentiment Indicator and a flash estimate for eurozone inflation, to gauge the outlook for Europe.

AXA Investment Managers is a fund manager for St. James’s Place.

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