While conversation around interest rates continue to dominate the headlines, economic recovery is in focus as vaccination progress is made across the major markets.
Week starting 22-03-2021
- All eyes were on the Federal Open Market Committee (FOMC) meeting on Wednesday, as Fed chair Jerome Powell delivered the committee’s revised economic forecasts.
- Real Gross Domestic Product (GDP) for 2021 is now expected at 6.5%, up from 4.2% in December. Unemployment has been revised down to 4.5%, from 5% in December, further indicating that the economic recovery is well on its way.
- Most notable was the upwards revision of inflation, which is now forecasted at 2.4% for 2021 (up from 1.8%). Powell indicated that inflation is likely to rise over the next few months, driven by pent-up demand. The Fed did not push back against rising inflation, reiterating their commitment to accommodative monetary policy until full employment in the labour market is achieved. Powell highlighted that employment is far from pre-pandemic levels and indicated that the Fed will support the economy for as long as is necessary.
- Interest rates will remain at 0.25% and the Fed will continue with their quantitative easing bond purchasing plan, including treasury securities and agency mortgage-back securities. It is worth noting that, while the majority of the committee does not foresee any interest rate hikes over the next three years, three members predict a rate hike in 2022. Furthermore, seven committee members expect interest rates to rise in 2023 (up from five members in December). Yields on US 10-year government bonds rose by 6.5% during the week, reaching new highs and closing the week at 1.73%.
- Furthermore, seven committee members expect interest rates to rise in 2023 (up from five members in December). Yields on US 10-year government bonds rose by 6.5% during the week, reaching new highs and closing the week at 1.73%.
- The Eurozone continues to lag behind the rest of the G7, concerning the economic recovery. Slow vaccination progress has weighed on the Euro, which continues its slump against developed market currencies.
- Coupled with blood clot fears surrounding the AstraZeneca vaccine, the Euro continued to trade with a bearish tone. Both USD/EUR and GBP/EUR currency pairs appreciated throughout the week, by 0.18% and 0.06% respectively, despite the actions of the Federal Reserve.
- The European Central Bank (ECB) will be meeting this week, after last week’s decision to implement an emergency bond purchase plan. Interest rates are expected to remain at record low levels, as the ECB continues to support increased economic activity. Consumer confidence will be released for the Euro area and is expected to come in at -14.8 for March.
- The narrative in the UK appears to somewhat mimic that of the US Fed, with an emphasis on economic recovery taking preference over inflation concerns.
- Bank of England’s (BoE) Andrew Bailey believes the recovery will be above pre-pandemic levels by the end of the year. With almost 50% of the population having had their first dose of the vaccine, there are strong prospects of a full economic recovery coming sooner than expected.
- Bailey touched on inflation, indicating that short-term inflation will likely exceed 2%. He didn’t appear too concerned about this, highlighting the preference for economic growth.
- As expected, the BoE will hold its benchmark interest rate at 0.1% and will continue with its £875 billion bond-buying programme.
- The Rand was unable to avoid the influences of global market factors, remaining volatile and moving on global influences. The USD/ZAR pair fell by 1.4% on Wednesday and ended the week 1.55% lower. The GBP/ZAR pair experienced similar movements, closing the week 1.92% lower around R20.40.
- This week, South Africa’s February inflation figures will be reported. Consumer Price Index (CPI) for the month is expected at 0.1%, slightly lower than January’s figure of 0.3%. Producer Price Index (PPI) is expected 0.6% for the month, and 3.8% year-on-year.
- The South African Reserve Bank will also be deciding on their interest rates, which is expected to remain at 3.5%.
- The Aussie Dollar made gains on the back of the FOMC meeting. However, Dollar strength on Friday saw the pair end the week on even ground. USD/AUD traded relatively flat on Monday and Tuesday, before dipping on Wednesday and retracing lost ground for the remainder of the week.
- Unemployment in Australia saw a swift decline to 5.8% in February, down from 6.4% month-on-month, with 88,700 jobs added in the month. However, despite strong employment data, Retail Sales declined by 1.1% in February.
- This week, manufacturing PPI for March will be released, which is expected to come in slightly below last month’s figure of 56.9. Output and new orders increased for the eighth consecutive month, although at a slight drag compared to January’s 36-month highs.
- The Kiwi Dollar followed a similar see-saw-like performance, with GBP/NZD and USD/NZD falling sharply on Wednesday and recouping the losses towards the end of the week. The Kiwi ended the week flat against developed market currencies and strengthened slightly against the Aussie Dollar.
- GDP for the quarter was reported at -1%, underwhelming the expected 0.2% growth. This puts GDP growth at -0.9% year-on-year. The current account deficit continued to shrink, exceeding expectations and coming in at NZD -2.7 billion.
- This week, the Westpac Consumer Survey will be released for quarter one. The country's Trade Balance for February will also be in. January’s trade deficit was NZD -626 million, after exports fell by 486 and imports fell by 256, and it is expected to continue shrinking.
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