Global Economy & Markets, Weekly Roundup 21/12/21

21/12/2021 - Reports

Global Economy and Markets

2021 ends with faster withdrawal of monetary stimulus (QE tapering, interest rate increases) due to inflation pressures and heightened pandemic-related uncertainty 
Key Takeaways
The Federal Reserve decided to double the pace of the reduction in net purchases (QE tapering) of US Treasury securities and agency MBSs as of mid-January 2022, to $30B instead of $15B per month. As a result, large-scale asset purchases will cease in March 2022 instead of June 2022, with a balance sheet expansion since March 2020 of circa $4.5T to $8.7T (38% of 2021 GDP). 

The median of FOMC members’ assumptions for the appropriate path of the Federal Funds Rate (“FFR”) points to three increases of 25 bps each from a current range of 0% - 0.25% in 2022,  instead of one in September’s projections.   

Stronger-than-expected inflation outcomes, combined with a greater progress towards full employment in recent months resulted in the hawkish turn. With three more FFR hikes envisaged for 2023 and two in 2024, the end-point for the FFR is 2-2.25% versus 1.8% in September, a tad below the longer-term estimate from FOMC participants (2.5%). 

Regarding the ECB, net purchases under the PEPP will decelerate in Q1:22 compared with Q4:21 (estimated at c. €70B per month) and cease in March 2022, as planned. To avoid though an abrupt tightening of financial conditions, net asset purchases under the APP (currently c. €20B per month) will temporarily increase to €40B per month on average in Q2:22, then reach €30B per month in Q3:22, before returning to “quasi” open-ended purchases of €20B per month thereafter.

PEPP reinvestments will continue in full until at least the end of 2024 (which represents an one-year extension to the respective guidance). Reinvestments could be adjusted flexibly, including purchases of bonds issued by the Hellenic Republic (non-eligible for participation in the APP programme as long as the Republic remains below Investment Grade) over and above rollovers of redemptions, while net purchases under the PEPP could also be resumed, if necessary.

On policy rates, the updated ECB staff projections for inflation, suggests no envisaged hikes up to end of the forecast horizon (end-2024) as average expected inflation in 2024 (1.8% yoy) still falls short of the 2% target. Nevertheless, the aforementioned anticipated level, is close enough to target, suggesting volatility ahead vis-à-vis interest rate expectations.     

The Bank of England (BoE) increased the Bank Rate, from +0.10% to +0.25% in view (i) of strong incoming data regarding inflation (CPI: +5.1% yoy in November, versus +4.5% yoy in BoE’s projections in November) and (ii) solid labor market conditions, with BoE members now expecting average unemployment rate of 4% in Q4:21 instead of 4.5% in their November projections.

Another interest rate increase to +0.50% is fully priced-in by the March meeting. According to the current guidance by the BoE, such an event would open the door to commencing a winding down of the QE portfolio of £895B  (39% of 2021 GDP) likely via reinvestments not taking place in full. 

Global equity markets recorded double-digit returns in 2021 as corporate earnings surged, while investment-Grade Aggregate Bond returns were negative, due to higher inflation expectations. A re-opening global economy, adverse weather conditions, geopolitical factors and pledges for a faster transition to net zero supported commodity prices.