Central banks are set to spend Q2:2021 maintaining their ultra-accommodative stance
US equity markets consolidated near all-time highs in the past week, with a dovish Fed and positive corporate earnings revisions, providing support. The Eurostoxx reached pre-pandemic levels (424), lagging US markets by seven months, albeit pockets of vulnerability (Turkey, China) and renewed lockdowns (Germany) trimmed risk appetite.
Policy commitment to retain interest rates at near zero for long despite improving growth and inflation prospects, has sent long-end US nominal government bond yields higher. Indeed, 30-Year and 10-Year UST yields have increased by 25 bps (2.40%) and 29 bps (1.70%), respectively, in March. As a result, the 10/2s curve has steepened to its highest level since 2015.
The Federal Reserve (March 17th) stood pat, as expected, with the target range for the federal funds rate at 0-0.25%. The median projected appropriate policy path from FOMC participants, despite the upgraded outlook for GDP and inflation, continued to point to no increase in the federal funds rate up to the end of 2023, even with a lesser unanimity among participants.
Real GDP growth forecasts for Q4:2021 were revised higher compared with three months ago, to +6.5% yoy from +4.2% yoy, in view of solid fiscal support ($2.8 tn or 13% of 2019 GDP cumulatively since December 2020) and a robust pace in the rollout of inoculations against Covid-19.
At the same time, the median forecast for the unemployment rate in Q4:2021 (on average) was revised down from 5% to 4.5%, while the respective projection for PCE inflation inched higher to 2.4% yoy from 1.8% yoy three months ago (2.2% yoy for core PCE inflation from 1.8% yoy).
The overall dovishness was complemented by the Fed Chair Powell, citing that it is not yet the time for discussions on when to taper asset purchases of circa $120 billion per month, while also underpinning the transitory nature of the anticipated pickup in inflation in coming months.
On the other side of the Atlantic, the European Central Bank expects a “significantly higher” pace of purchases under the PEPP over Q2:2021, albeit the total envelope will remain unchanged at €1.85 trillion until March 2022 (utilization of €914 bn as of March 19th). According to ECB data, PEPP purchases accelerated significantly in the past week.
That development comes against the backdrop of the rise in euro swap interest rates and sovereign bond yields in longer-term tenors since the start of the year, rather reflecting prospects of a stronger global --than euro area-- economic recovery.
The Bank of England (March 18th) refrained from hinting at any alteration in the monetary policy, at least in the near future (Bank Rate: 0.1% | QE envelope of £895 bn, utilization of £785 bn as of March 17th). The BoE acknowledged the improvement in the short-term economic outlook, albeit shying away from suggesting changes in its medium-term outlook.
Finally, the Bank of Japan (March 19th) made only minor changes to its policy settings, allowing for a somewhat increased flexibility. Regarding the 0% target for the 10-year Japanese Government bond yield, the BoJ set a band of ±0.25%, instead of ±0.20% (short-term policy rate: -0.1%).