Week Ahead: FOMC minutes, RBA decision & Deliveroo woe

FOMC meeting notes are released this week giving us the inside look at the latest Fed meeting. In Australia, the RBA makes its cash rate decision but it’s likely nothing seismic is coming. Deliveroo also enters unconditional trading following a shaky start. 

FOMC minutes released following dovish March meeting 

The minutes from the March 17th FOMC meeting are released this week, confirming the course Jay Powell and the Fed want the US economy to take this year. 

According to our Chief Market Analyst Neil Wilson’s view, the Fed looks like it’s content to keep running the economy hot this year with no major policy changes on the horizon. 

Doves rule the roost in the Fed at the moment. The key takeaways from March’s Fed meeting are: 

• No hikes through 2023. 4 from 1 see a hike in 2022, whilst 7 see a hike by 2023 
• Inflation is seen at or above 2% through 2023, including 2.4% this year, 2% in 2022 and 2.1% in 2023. This is perhaps a little light, says Neil, and if inflation starts to move significantly higher than this it will be a problem and yields could back up further. This is the primary risk now for the Fed as AIT lets inflation expectations become unanchored. 
• GDP forecast boost to 6.5% in 2021 from December’s projection of 4.2%, with expansion seen at 3.3% in 2022 and 2.2% in 2023. 

Additionally, the Fed also expects the unemployment rate to reach 4.5% by the year-end. That would be very impressive, given the rate was as high as 13% during the Covid-19 pandemic’s peak. In 2022, the Fed projects the unemployment rate to fall to 3.9% and then to 3.5% the following year. 

Importantly, expects inflation to stay in check for the foreseeable future. Benchmark rates are set to stay near zero until 2024. 

The US economy could be about to boom. We’ve seen increased nonfarm payrolls in recent months, as well as upswings in monthly GDP. Biden’s stimulus package has been passed into law with $1.9 trillion being pumped into the economy, including stimulus cheques for US citizens, and billions in support for SMEs.  

The challenge now will be to keep ahead of inflation. Rising US bond yields have continued to cause uneasiness for investors. US 10-year Treasury yields have risen to their highest since January 2020 since the Fed meeting took place. . 

Still, the focus appears to be staying the course and letting the economy do its thing. 

RBA cash rate – is a big decision coming? 

The Reserve Bank of Australia makes its cash rate decision this week following last month’s decision to keep rates at their record low in March. 

Governor Phillip Lowe committed tonot moving on rates until  2024 at the earliest, stating wage growth in line with target inflation is unlikely before that year. In his March speech, Lowe stated that Australian wage growth is currently at 1.4%, the lowest on record, but said he sees no signs that it will reach 3% prior to 2024. 

Even so, Australia’s GDP has been steadily increasing as lockdown measures are lifted and some measure of normality returns. Quarterly GDP rose 3.1% in December, following 3.6% in the previous quarter. 

Stimulus is still key to ongoing recovery. Bonds are an important tool in this process. Because of their significance, The RBA has made it more costly for speculators to short bonds that are key to policy stimulus. It has doubled the fee charged for lending out April 2023 and April 2024 Australian government bonds to 100 basis points, essentially costing speculators more if they want to short those bonds. 

This is part of a wider strategy to help the RBA tackle rising bond yields, but also a response to market expectations that it may be about to soften commitment to the 0.1% yield target it has in place. 

Governor Lowe said the bank remains committed to the 3-year yield target and recently purchased bonds to support the target and will continue to do so as necessary. Additionally, bond purchases under the bond purchase programme were brought forward in mid-March to assist with the smooth functioning of the market. 

Deliveroo enters unconditional trading 

Deliveroo went public on 31st March and will be available for unconditional trading from April 7th. 

So far, it’s been a less than stellar start for what was one of the most hotly anticipated IPOs of the year. Shares in Deliveroo got off to a horrible start on the market, declining 26% on its first day of trading after pricing at £3.90. It’s a very big early move lower and there will be chatter about what this says about the broader market, investor appetite for listings, the state of the UK economy, and so on. 

It reflects the cautious approach big funds have shown to the stock amid concerns about working practices and governance. A lot of the big UK funds are not on side, which was failure number one.  

Will Shu could have avoided that by going for a premium listing and eschewing the tech stock desire for a dual-class structure that leaves power with the founder.  

Old City habits die hard, despite what the FCA wants to do. There could be implications for the plans by the government and Lord Hill to loosen listing rules – but probably not material. If anything, it might make some want to get change faster so these kind of tech stocks can be indexed – it hardly shows off London as the place to list a tech stock. Retail may also have been put by some of the negative chatter on social media and in the press – the narrative has been negative really since it came out with the IPO.  

Chiefly though it reflects the fact that even pricing the IPO at the bottom of the range, Deliveroo was demanding too high a price tag for a loss-making delivery platform in a very competitive space with a questionable path to profitability. The books were covered, it was just plain mis-priced. 

Major economic data 

Key earnings data