The Federal Reserve is expected to start tapering this year, albeit will remain focused on the impact of rising Covid-19 cases on US economic growth momentum
Global equities edged higher in August, with the MSCI ACWI up by +1.8%. Developed Markets overperformed (+2.1%), whereas their Emerging peers lost ground (-0.4%). As a result, the performance gap widened further, mainly due to China’s (i) regulatory actions; (ii) weakening growth momentum; and (iii) tightening of Covid-19 control measures.
The volatility that emerged following the minutes of the meeting of the Federal Open Market Committee on July 28th, which were published on August 18th (S&P500: -1.1%, with the VIX index posting a 1-month high of 22%) was short-lived.
In the event, according to the minutes, “most” participants judged that it could be appropriate to start reducing the monthly pace of net asset purchases “this year” (current pace: $80bn in US Treasury securities and $40bn in agency mortgage-backed securities). Notably, Fed Chair Powell was among the “most” participants, according to his Jackson Hole Symposium remarks.
Market reaction was muted, with long-term US Treasury yields declining slightly post Chair Powell remarks, as the Federal Reserve plans to slow down its large scale asset purchases smoothly, whereas the tapering start will remain conditional on the data flow (US labor market report due on September 3rd).
In addition, such a development (i.e. any tapering is finished) should not be linked to the future timing of rate hikes on a mechanical route. Market pricing of Fed hikes has remained broadly stable post Jackson Hole.
Chinese equities jitters contributed to the aforementioned Emerging Markets underperformance. Indeed, the MSCI China Index was down by -3.3% in August, while having lost 22% from their recent peak (June 1st) to trough (August 20th | +5% since then).
Chinese equities have retreated as the economic momentum has disappointed. In the event, the annual growth of retail sales decelerated by 3.6 pps to +8.5% in July, versus consensus estimates for +10.9%. In a similar vein, industrial production decelerated by 1.9 pps to +6.4% (consensus: +7.9%).
The aforementioned easing has come alongside less intensive policy support, with overall credit growth, as measured by Total Social Financing, at +10.7% yoy in July, versus a peak of +13.3% yoy in February 2021. Furthermore, Chinese authorities have signaled a back-loading of fiscal policy support, towards the end of 2021.
Moreover, concerns for a broad tightening of the regulatory grip on firms have increased, after, inter alia: i) a mandatory conversion to non-profit institutions of firms that provide kindergarten to 12th grade (K-12) after-school tutoring (furthermore, foreign capital is no longer allowed in these institutions) and, more importantly; ii) a major data protection law, which passed on August 20th.
Overall, high frequency data and global PMI indicators point to a continued loss of global growth momentum, albeit from elevated levels. Investors will also remain focused on the impact of rising Covid-19 cases on global economic activity, on both supply and demand sides.