Week ending 16th July 2021.

Global equity markets ended the week slightly lower thanks to renewed concerns that increasing coronavirus infections will weaken the economic recovery, especially given that today’s (Friday 16 July 2021) University of Michigan’s consumer sentiment index unexpectedly declined (to 80.8 in July, from 85.5 in June and economist expectations of 86.5).

However, we believe that a US economy growing at a slightly more moderate pace will help ensure that the Fed keeps US interest rates low – and thankfully, the Fed chair, Jay Powell this week stated that it is too early to start scaling back the US central bank’s monetary support despite this week’s (please see here) higher CPI inflation reading, as the US employment market needs to see “substantial further progress”.

Looking ahead to this coming week, the focus will mainly be on Europe and Thursday’s (22 July 2021) ECB monetary policy meeting.

The ECB’s sole mandate to maintain stable inflation was recently amended from its vague “below, but close to, 2%”, to a symmetric target, allowing short-term periods of above 2% CPI inflation to be looked through.  While similar to the recent changes seen at the Fed, the ECB has stated that it’s not following the Fed in letting inflation run hot to make up for past below target inflation.

Although this change is positive, it doesn’t mean very much as we are unlikely to all of a sudden see inflation running above 2%.  In fact, since the global financial crisis in 2008/9, Eurozone CPI has averaged just 1.3%, while core CPI (which excludes volatile items such as food and energy) has averaged 1.1%.  As an aside, the oil price fell sharply over the week on the potential for slower economic growth, coupled with speculation that Saudi Arabia and UAE had reached an agreement that will see OPEC increase supply – and a lower oil price will help to relieve some of the recent inflationary pressures.

However, in our opinion, what this ECB change actually does, is effectively tells the financial markets that the removal of the Eurozone’s ultra-loose monetary policy is a distant prospect – which is positive for equity markets.

This week’s other data releases included:  UK retail sales; US, UK, Eurozone & Japanese PMI; and US housing data.

Investment management Team

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