An eventful week

This an eventful week with several central bank meetings – including the Fed’s last night – and lots of economic indicators. Last week, the Bank of Canada decided to hold its key rate steady at 0.25%. This decision was taken as first quarter GDP growth stands at 5.6% on an annualised basis, slightly below expectations, and as a contraction is expected in April. The central bank does not plan to raise the key rate until the economy has fully recovered, which could be in the latter part of 2022. The next day, the European Central Bank also left its monetary policy unchanged, both in terms of the interest rate which remains at -0.50% and its pandemic emergency purchase programme (PEPP). This will continue to massively support the economic recovery with such a high rate of asset repurchases (€80 billion per month), more than during the first months of the year. Christine Lagarde said that despite improving indicators (the bank raised its inflation and growth forecasts), it was still premature to consider a reduction in the aid programme and that the recovery would have to be firm and sustainable before that happens.  Also in Europe, we can note that the Greek 5-year rate has turned negative for the first time in its history. The country has took out more debt at -0.02%. Unthinkable ten years ago, when the country was mired in a deep financial crisis and had to pay more than 40% to borrow! Italy is now the last country in Europe with a positive 5-year rate.

In an attempt to control inflation, the Russian central bank continues on its path of rising interest rates, going from 5% to 5.5% last Friday. After dipping to a low of 4.25% last year, this is the third consecutive increase in 2021 and arguably not the last, with the CBR hinting that an even larger rise could take place at the next meeting on July 23. Following the announcement, the rouble reacted by appreciating against the dollar, below 72. But that only until the Americans had something to say…

Inflation is also a cause for concern in the United States, and the latest figures did little to assuage any fears. In May, prices continued to rise and the increase is now 5.0% on an annualised basis, beating an already high consensus of 4.7%. Consumer prices (excluding energy and food) hit a 29-year high. Even though this is in part due to a catch-up effect, its quite a sobering figure and the question is how long will this high inflation last. The members of the Fed as well as Secretary of the Treasury Janet Yellen agree that it should be only temporary. In this context, yesterday’s Fed meeting was eagerly awaited. As expected, the central bank of the United States is keeping its rates unchanged and maintaining its bond purchasing programme at $120 billion per month. It is keeping its forecast for this year’s unemployment rate (4.5%) but increasing its forecasts for growth (7% instead of 6.5%) and inflation (3.4% instead of 2.4%) for 2021. Above all, as illustrated by dot plots, a majority of Fed members are now considering a rate hike from 2023, which surprised the markets.  The consensus was previously of a rate hike from 2024. Regarding the tapering, the subject was discussed but no timetable was defined, with Fed Chair Jerome Powell stating it was premature to reduce the support to the American economy.

The markets reacted to these announcements. The US stock market ended slightly lower, and yields on Treasury bonds surged. The yield on the 10-year bond, which had fallen below 1.50%, crossed the bar again and stood at 1.58%. Gold, which had failed to settle permanently above $1,900 per ounce, lost ground and fell back to $1,815. The dollar strengthens more than an entire cent against the euro, falling from above 1.21 to below 1.20.

During the week, and before the Fed pushed the greenback up, oil had continued its rally and hit a two-year high of $73 a barrel. The International Energy Agency (IEA) has released data suggesting a strong return in global demand which is expected to surpass pre-pandemic levels by the end of next year.