The Federal Reserve confirmed consensus expectations for an eight-month tapering of QE purchases
Positive labor market surprises, strong corporate earnings and a dovish message on the timing of future interest rate hikes (Powell, Lagarde) supported a pick-up in risk appetite in the past week. The MSCI ACWI increased by 1.6% wow (+17% YtD), with Developed Markets overperforming their Emerging Markets peers. Note, that, EM equities have now fallen back to 2001 levels against the S&P500.
The S&P500 took another leg higher reaching a fresh all-time high (4702) as nonfarm payrolls exceeded expectations for the first time in three months (+531k, see Economics) and Q3 earnings results were stronger-than-expected. With 90% of S&P500 companies having reported so far, EPS have increased by 39% year-over-year and 82% of companies have beaten analysts’ EPS estimates.
Regarding sectors, Consumer Discretionary (including Tesla) and Technology led the increase as valuations of growth stocks benefitted from the decline in discount rates. Big tech has reported mixed results in Q3, with FB, AAPL and AMZN disappointing expectations due to, inter alia, lower ad revenues and supply-chain issues. US Financials lagged in the past week as long-term Treasury yields declined, following though a significant upward move since September 20th.
Government bonds rallied as the Bank of England kept interest rates unchanged (by a majority of 7-2) against market-implied expectations and the Federal Reserve announced, a well-telegraphed, tapering of its asset purchases ($120B/month) by $15B per month that will conclude the QE programme in June 2022. Front-end rates declined up to 30 basis points (Gilts). Long-term euro area Government bond yields decreased by 20 to 30 basis points, with periphery bond spreads reversing a portion of their recent widening.
Chair Powell clarified that the QE tapering decision does not imply any direct signal for an interest rate hike, while adding that there is still ground to cover, considering the maximum employment goal. Supply bottlenecks and shortages will last “well into next year”, maintaining prices elevated, albeit Powell expects inflation to start declining by the second or third quarter of 2022 (CPI: +5.4% yoy in September | consensus expectations for October, due on November 10th, +5.8% yoy).
The Bank of England (BoE) judged that it is appropriate to wait for additional data regarding developments in the labour market, especially for the period following the end of the Coronavirus Job Retention Scheme on September 30th. According to BoE, providing that the incoming data, particularly on the labour market, are in line with projections, an increase of the Bank Rate would be necessary in the coming months in order to reduce CPI inflation sustainably to the target of 2%.
Note that UK headline inflation is expected to accelerate to 4.5% yoy in November (from 3.1% in September) and peak at around 5% in April 2022, before declining significantly from H2:2022, according to BoE estimates based on market pricing for 4 interest rate hikes by the end of 2022 (Bank Rate at 1%).
Short-term forecasts for UK real GDP were revised downwards, compared with August, reflecting supply chain disruptions and a weaker-than-expected recovery in consumer demand. Real GDP is now expected to return to its pre-pandemic levels in Q1:2022, instead of Q4:2021.