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Potential big rate decisions are being made on both sides of the Atlantic this week with the Bank of England and the US Federal Reserve holding meetings. We’ll also get a glimpse of US economic recovery as retail sales data is released. Was January’s upswing a fluke or is sustained growth back in action? 

 

BoE rate decision: unlikely to change but post-budget outlook has changed 

Interest rates and inflation are expected to take centre stage once again as the Bank of England reveals its latest monetary policy decision this week. 

2% inflation is still the target, and it’s probably that the 0.1% bank rate will remain in place. In February, at the last major BoE rate meeting, the bank’s Monetary Policy Committee (MPC) members voted unanimously to keep that in place.  

Speaking at a Resolution Foundation event on Friday 5th March, Governor Andrew Bailey said the Bank will not raise interest rates in relation to a rapid economy recovery, saying he would need to see “real evidence” that 2% inflation would be sustainable before any rate hikes are implemented. 

However, Governor Bailey also said the BoE is preparing for negative interest rates in the event of a disappointing recovery. It is also doing the groundwork to be ready if rapid spending caused by the Covid-19 pandemic could lead to increased inflationary pressure. 

Markets don’t expect negative rates to be enacted any time soon. Instead, according to the Financial Times, it’s expected the Bank will raise interest rates in 2022. 

Forecasts have also been adjusted to be in line with Chancellor Rishi Sunak’s stimulus-led budget. According to Bailey, they’re looking stronger, as the new spending-heavy budget should help stimulate the economy and job market, bringing unemployment below the previously predicted 7.75% level. 

“Our last forecast was pre-Budget,” Bailey said, adding that in the next forecast in May, “we will have a lower profile of unemployment in the near term and probably lower throughout”. 

Essentially, the BoE will be looking forwards as always, but it’s unlikely to change its base rate from its current 0.1% when it meets this week. 

 

FOMC press conference – stick or twist? 

Across the pond the Federal Open Market Committee (FOMC)  meeting will be taking place. It’s pretty much the same story as the BoE meeting, but with a bit of a twist – possibly literally. 

Fed Chair Jay Powell has been sanguine regarding yields, vowing to keep policy steady last week, despite his comments triggering a selloff in long-term treasury debt. 

 Powell said the central bank expected to be “patient” in withdrawing support for the recovery, given that the labour market remained far from the central bank’s goal of full employment and had made little progress in recent months. 

What does this mean ahead of the FOMC meeting? CNBC reports that some technical tweaks could be made to the Fed’s existing monetary policy, stimulated by recent turmoil in the bond markets.  

One could be the reintroduction of Operation Twist, where the Fed sells short-term bills and buys longer-duration bonds. The objective is to nudge up shorter-term rates and drive down those at the longer end, thus flattening the yield curve. The Fed last employed such a tactic roughly a decade ago during the tumultuous European Debt Crisis. 

Another option the Fed could explore would be to increase the rate paid on reserves to cover money markets issues, while also adjusting the rate on overnight repo operations in the bond market. 

Prospects for the US economy have brightened somewhat with a slowing in Covid cases, increased vaccination rollout, and the approval by the house of President Biden’s stimulus package. Nonfarm payrolls showed a very healthy increase in jobs added to the US economy last month, surging by 379,000. 

But bond yields will need to be tackled, especially as the US treasury needs its next bond auctions to go well. The Fed likely to keep buying its $80bn worth of Treasury securities, using them to buy bonds with a four- and half-year duration, according to CNBC, simply because a large supply of extra stimulus is coming, and it will need to raise capital to deal with a potential deficit of $2.3 trillion. 

While no major change is forecast, it’s possible we will see those technical tweaks mentioned above. Bond yields will dominate the conversation, as they have done for the past couple of weeks.  

 

US retail sales – economic retail therapy? 

Latest US retail sales data is released this week, and it good be more good news for the States’ economy if January’s upward swing continues. 

In the last retail data release, sales were up 5.4% – the largest leap for 7 months – according to the US Census Bureau. The figure sailed past predictions of a small 1.1% rise and were up 7.4% versus January 2020. 

Extra cash in the form of stimulus cheques is expected to be behind January’s rise in retail spending. American citizens were given $600 from the Treasury’s pocket – and higher cheques are on the way as President Biden’s centrepiece stimulus package has been approved by The House. 

In the long term, retailers predict 2021 will be a good year for the sector. Stimulus and vaccines are forecast to make a real impact in the sector, especially if there is a road out of lockdown this year.  

Total overall retails could rise as much as 8.2% across the year to reach over $4.33 trillion in 2021 as more people get the COVID-19 vaccine and the economy reopens, the National Retail Federation (NRF) said in February. Ports are subsequently bracing for a spike in imports of consumer goods. 

According to Census Bureau data, demand picked up across all key categories including cars, electronics, recreational goods, grocery stores, building materials and home goods such as furniture. Non-store retail, including e-commerce, grew by climbed 11% in the last review period, suggesting online retail continues to make gains as access to bricks-and-mortar stores remains restricted. 

Can this continue into February? It’s possible. It depends really on how much ready cash Americans still have to spend on consumer and luxury goods, but strong sales will be a good barometer to judge the pace of US economic recovery. 

 

Major economic data 

Date Time (GMT) Currency Event 
Tue 16th Mar 12.30pm USD Core Retail Sales m/m 
 12.30pm USD Retail Sales m/m 
    
Wed 17th Mar All Day EUR Dutch Parliamentary Elections 
 12.30pm CAD CPI m/m 
 2.30pm USD US Crude Oil Inventories 
 6.00pm USD FOMC Economic Projections 
 6.00pm USD FOMC Statement 
 6.30pm USD FOMC Press Conference 
 9.45pm NZD GDP q/q 
    
Thu 18th Mar 12.30am AUD Employment Change 
 12.30am AUD Unemployment Rate 
 12.00pm GBP MPC Official Bank Rate Votes 
 12.00pm GBP Monetary Policy Summary 
 12.00pm GBP Official Bank Rate 
    
Fri 19th Mar 12.30pm CAD Core Retail Sales m/m 
 12.30pm CAD Retail Sales m/m 

 

Key earnings data 

Date Company Event 
Tue 16th Mar Volkswagen Q4 2020 Earnings 
   
Wed 17 Mar BMW Q4 2020 Earnings 
 NorNickel Q4 2020 Earnings 
   
Thu 18th Mar Nike Q3 2021 Earnings 
 Enel Q4 2020 Earnings 
 FedEx Q3 2021 Earnings 

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