ECONOMIC AND MARKET OVERVIEW
Global
Speculation over whether the current state of inflation is transient or not dominated market commentary in recent weeks.
In their most recent Multi Asset Monthly Commentary, Prescient Investment Management analysed the combined impact that the various fiscal packages in the United States will have on inflation, interest rates and the US dollar. On any measure, the size of the latest US fiscal package is very large. Moreover, it comes hard on the heels of a second fiscal stimulus in December 2019 and, if President Biden gets his way, not the last.
Given the new US stimulus package is once again focused on supporting near term demand rather than long term productive potential, a blind eye cannot be turned to the risk of overheating. Combined with the latest increases in the price of oil and other commodities, as well as COVID 19 induced supply bottlenecks, inflation is still the main concern in financial markets, contributing to the rise in global – and primarily US – bond yields.
The Federal Reserve’s Chair, Jerome Powell, insists that the Federal Open Market Committee (FOMC) will look through what it sees as a period of transitory inflation and that it will be very patient in waiting to see evidence of a sustained rise in inflation before raising rates it will not be taking pre emptive action based on forecast measures of slack in the economy, even the unemployment rate. Its new “outcome based” forward guidance means it will not even slow the still hefty rate of asset purchases “until substantial further progress” has been made towards the FOMC’s maximum employment and inflation goals Dependent on widespread, effective distribution of COVID 19 vaccines and an acceleration in economic growth through the middle part of this year, they expect the FOMC to keep financial conditions loose over the short to medium term.
