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Smart News - In focus: economic data and central bank speeches

Market Update

In focus: economic data and central bank speeches

There were some big market moves last week in the wake of the US Federal Reserve’s September monetary policy meeting. Primarily, this is where members of the central bank meet to discuss and then announce any changes to US interest rates. In summary, the central bank delivered everything it had previously promised, but this still wasn’t enough to prevent a sharp stock market sell-off.

Last month, Fed Chair Jerome Powell announced that the central bank would adopt Average Inflation Targeting. This meant that inflation would have to exceed the old 2.0% target for some time before the central bank would even consider raising rates. In fact, the Fed tied this to another condition. In addition to inflation exceeding 2.0% for an unspecified period of time, the unemployment rate also has to fall back to around 4%, a level the Fed views as signifying ‘full employment’. In this way, the Fed’s double-pronged target is fully consistent with its dual mandate of maximising employment while ensuring price stability.

Nowhere near target

Currently Core PCE comes in around +1.0% year-on-year while the Unemployment Rate stood at 8.4% in August. So, in a nice bit of symmetry, inflation has to double while unemployment has to halve. In terms of how realistically achievable this is, the last time inflation was above 2.0% was at the end of 2019. Meanwhile, the unemployment rate had been trending down for 10 years until it hit a fifty-year low of 3.5% in March 2020. While these two targets may seem within easy reach given how recently they were both hit, it’s worth noting that there have only been three occasions in the last sixty years when these levels were hit at the same time. Firstly, in the late 1960s as inflation took off during the height of the Vietnam war. Then in 2000 at the peak of the Dot-Com boom and finally in 2018 on the back of Trump’s tax cuts and a soaring stock market.

Consequently, the main takeaway from last week’s meeting was that the Federal Reserve doesn’t expect to be raising interest rates anytime soon. In fact, committee members forecast that the Fed funds rate will stay below 0.25% out to 2023 and probably beyond. Not only that, but the US central bank will continue to purchase Treasuries and other assets at current levels of around $120 billion per month.

So why the stock market sell-off? It could be disappointment that Fed chair Jerome Powell didn’t promise to raise asset purchases at a faster rate that led to investors unloading stocks. Or perhaps it was his declaration that the government should step up to provide more fiscal support? On the latter issue, it’s not the first time that Mr Powell has told policymakers to step up to the mark. But this time there’s a bit more urgency. The initial government response to the economic slump from the coronavirus pandemic is coming to an end and something needs to replace it. This acts as a reminder that after six months the pandemic isn’t over. Yet Congress remains at loggerheads over the scope of an additional  coronavirus relief package.

Recent US economic data releases have been positive over the past few months, with the vast majority of the numbers beating analysts’ expectations. The only fly in the ointment has been the recent disappointment over Non-Farm Payrolls and weekly jobless numbers. But from a trader’s point of view, any weakness in the employment data just makes it more likely that the Federal Reserve will continue to keep the monetary stimulus coming. This should continue to offer support for shares and bonds, although there are concerns that the Federal Reserve’s balance sheet will have to keep expanding permanently to prevent an unsettling decline in stock prices.

Data and central bank speakers

This week’s ‘Highlights’ feed on Smart News is a little less busy than it has been of late. But there are a few corporations set to deliver their earnings, including Costco Wholesale, CarMax, Kingfisher and United Utilities. As far as economic data goes, we’ve got Flash Manufacturing and Services PMIs from the US, Euro zone, UK and Australia and US Durable Goods on Friday. There’s also a clutch of speeches from central bankers with Jerome Powell delivering testimony on a number of topics over the course of the week. But perhaps the main one to look out for is on Wednesday when he’s due to testify on the economic impacts of COVID-19 before the House Select Committee in Washington DC. So, make sure you keep on top of everything that’s happening by clicking on our Smart News widget which you’ll find in the bottom right-hand corner of the trading platform. Here you’ll find all the top commentary and updates from the key voices and influencers across social media, helping you make the best trading decisions.

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