Key To The End Of Stimuli Is The Timing, Not The Announcement

At this point, the announcement of the tapering (end of debt purchases and rise in official interest rates) by the Federal Reserve (Fed) is the least of it. It is neither expected nor expected. It is taken for granted, sooner or later. Maybe not at Jackson Hole, and yes at the September meeting. It will be the same.

What is really important is the timing of the withdrawal of stimuli . And notes on the calendar could arise at any time, or could be anticipated in the face of new data that continue to clearly show the recovery in employment, high inflation and, ultimately, a solid economic recovery after the shock of the coronavirus pandemic, as has been happening in recent weeks.

The latest official record is that the first phase of tapering, a reduction in debt purchases, will begin before the end of 2021.

“Earlier this year, many market participants anticipated that Jackson Hole would be the place where [Jerome ] Powell [Fed Chairman] would probably announce his stimulus withdrawal plans, but that view had two flaws: first, Jackson Hole has rarely been a key market event; second, more importantly, Powell It has been clear that tapering plans would be telegraphed well in advance, “says Garrett Melson, strategist at Natixis IM.

“Everyone knows what is coming, whether it has been announced or not, it does not really matter, since it has been known for months that it is on the horizon,” he continues.

The key then is the timing. “The debt market is eager to hear from the chairman of the Federal Reserve on when he will reduce the monthly purchases of US Treasuries,” said Yves Bonzon, CIO of Julius Baer.

“For more than a year, the monetary institution has been making purchases at a constant rate of 80,000 million dollars a month, financing about a third of the federal deficit, and there are good arguments to think that there will be a tapering soon, as they can. be the progress in the labor market and the current level of inflation, but there are also factors against such a measure before the details of the next government budget are known “, assures the expert of the Swiss bank.

“That said, we strongly argue that even in the event of a rapid reduction in monthly Fed purchases, there will continue to be a shortage of safe haven assets with positive returns,” warns Yves Bonzon.

Risk of slowdown
Some crucial data will accompany the meeting of central bankers in Jackson Hole, after the doubts that have arisen in China and that have impacted on oil and other raw materials due to the incidence of the Delta variant of Covid and its consequences on the recovery.

Ahead, the publication of the leading PMI indices for the United States, Germany, the euro area as a whole and the United Kingdom, on Monday 23 August, for the manufacturing sector and for the services sector . These indicators “will give us clues about the growth outlook for the fall: in general, the economic environment, which is the basis of corporate earnings, should remain favorable,” explains Ann-Katrin Petersen, analyst at Allianz.

“We continue to forecast world growth of more than 6% for all of 2021, this would represent the largest expansion in more than four decades,” he adds. “However, it is worth taking a closer look at individual economies: in the US, in particular, the chances of favorable surprises are down; after all, the economy is already booming,” he continues.

“Our Global Macro Breadth Index was already pointing to a slowdown in July, with an improvement in data from the eurozone and the United Kingdom, offset by more moderate figures from the United States, Japan or China (which fell for the third consecutive month)” , observe.

Behind, on Friday, August 27, the inflation indicator preferred by the Fed, the price index of personal consumption expenditure (PCE) will be known. Inflation measured by this index reached 4% year-on-year in July, considerably above the central bank’s 2% average target. Investors continue to wonder if the rise in inflation is mainly due to one-off effects that could play a minor role in 2022.

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