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Weekly Commentary 23 June 2021

Weekly Market Commentary


The output of the US Federal Reserve (Fed) meeting shows expectations of a 2023 rate rise


While the initial reaction to the Fed meeting last week was contained, by the end of the week bond yield curves had shifted quite dramatically. Longer-term yields fell and shorter-term yields rose, as the market priced in higher interest rates short term, which would reduce inflation pressures down the line.


Bank of England meets this week, as the committee considers higher growth and inflation data


One of the macroeconomic highlights of this week will be the Bank of England meeting on Thursday. While a formal policy change is not expected, the tone is likely to become more positive given the economic momentum behind the UK in recent months. There has been strong inflation, growth and employment data since the last meeting in May, all suggesting a tighter monetary policy may be warranted. Of course, the fly in the ointment is the Delta variant of COVID-19, which continues to drive daily cases higher. There are, however, some early signs that the pace of acceleration is slowing. Ultimately, the Bank of England is expected to keep interest rates at close to zero and to maintain its overall target stock of asset purchases.


This week will test Fed speaker coordination, with a united front key to maintaining 2021’s low volatility environment


2021 has seen an impressive level of coordination between Federal Reserve speakers and this has been a major factor in keeping equity market volatility under control. After the Fed’s meeting last week, the communications blackout has ended, so this week we hear from a range of speakers (voting and non-voting), including the Chair himself. Last Friday, non-voter Bullard said that his inflation forecasts justified a hike in late 2022, which concerned markets. This week will be a key test of whether this coordination continues, now that the tapering and interest rate hike debate is out in the open. If the Fed appears to be divided in public, this could be a source of significant bond and equity market volatility, as it makes each upcoming Fed meeting more and more unpredictable.


While equities are still hovering near their all-time highs, bond markets have shifted dramatically in the days post the Fed meeting. This will be a reminder to the Federal Reserve of the role of their policy wording in keeping short-term rates contained. Even if there was more disagreement at the meeting itself, the recent volatility may be enough for the Fed Governors to coalesce around a central view for the short term at least.


The Week In Numbers



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