Multi-Asset

Weekly review: central banks turn hawkish – what does this mean for markets?

Macro Update 9 August 2021

August 2021

Key takeaways

Central banks turn hawkish – what does this mean for markets?

Major central banks are cautiously moving in a hawkish direction – how will this affect markets? And as the Delta variant continues to sweep across the world, should we be worried?

The US economy: welcome to the working week

Before addressing these questions, let’s begin with the strong employment data out of the US. Almost 1 million new jobs, a fall in unemployment, higher wages and a longer working week. It was strong across the board. That should have been no surprise: survey evidence has been saying that jobs are plentiful for months. The problem has been workers reluctant to take jobs, especially in less attractive areas. Lost in the headlines about jobs was another piece of data: the Institute for Supply Management survey of services. It hit a record in July, and that series goes back decades.

That all shows that the US economy is booming. And it’s a similar story across developed markets. Lockdown restrictions are being eased, while consumers have money in their pockets and are spending freely. They have already stocked up on goods – or at last they have ordered them and are waiting for delivery – and the strength is now to be seen in services. Industrial production is still constrained by shortages of key inputs like semiconductors. Inventories are low so there is pent-up supply to come.

Central banks: beyond relief

It is now a clear consensus that the US Federal Reserve (Fed) will announce a tapering of their bond purchases before year end. That’s hardly aggressive: it just means that they’ll ease policy more slowly. More importantly, the vice chair talked last week about hiking the Fed funds rate at the end of next year – much earlier than previously indicated. And the Bank of England took a hawkish tone last week too.

This is clearly bad news for bonds – yields rose in the UK and US last week. But is it bad news for equities? We think not. Inflation worries are there and set to increase – watch out for the US CPI this week – but these moves by central banks are in response to greater confidence in growth. The developed world has vaccinated most of their adult population and this has weakened the link between infection and serious illness. Health systems can cope, despite the Delta variant.

Equity bull market: the other side of summer

More generally, equities typically do well in the run up to the first Fed rate hike, and for some time thereafter. If this pattern were to be repeated, the equity bull market could last through to the other side of summer and well in to 2022, perhaps even beyond.

It’s a different story in emerging markets, where vaccination rates are lower, health care systems weaker and inflation worries greater. So, we repeat our preference for equities over bonds and cash, and developed markets over emerging markets. Indeed, developed market equities have recently reached new record highs.

Risk Disclaimer

Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Weekly review: central banks turn hawkish – what does this mean for markets?

Steven Bell

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