MUNIX COMMENTARY – 25th November
Minutes are not at all boring
Most major economies are seeing stable or even moderately higher benchmark bond yields as November comes to an end. For example, UK 10-year gilts are yielding close to 1%, their US equivalent close to 1.65%, and Japanese yields are – rather unusually – back into positive territory. The explanations are clear – further moderately hawkish commentary from policy makers, against the backdrop of evidence that inflation will go higher and last longer than central banks had expected.
Minutes of most meetings are rather boring to read, but when they are the record of the Federal Reserve they deserve careful examination. Even small changes of tone and nuanced statements can indicate shifts in the on-going debate. While the most recent release did not give any dramatic new insights, it did indicate that a growing number of Fed Governors would be open to speeding up tapering, that is reducing the pace of bond purchases, if inflation held up, as the bank’s research staff warned might well be the case, opening the door to moving more quickly on rates.
Inflation commentary in the minutes was generally hawkish, and such worries are easily explained by the latest bout of data releases. A combination of demand and supply side shocks caused US core personal consumer inflation in October to exceed 4% a year, double the Fed’s official target. A long-standing survey of professional forecasters by the Philadelphia Fed reported that the 10-year inflation projection has risen above 2%, its highest since 2014
If tapering is larger and faster, it could finish by March or April next year, rather than in June. This would mean earlier interest rate moves could be on the cards. The debate amongst economists is whether the first Fed rate rise could be in Q2 rather than Q3 next year, opening the way for three rate increases in 2022.
Other statistics support the moderate uptrend in global bond yields which is being seen. After weaker economic growth in Q3, leading indicators such as new orders or investment intentions are giving plentiful signs of a sizable rebound in Q4. Fiscal policy is expected to move from highly supportive in 2020-21 to rather contractionary in 2022, but decisions by the US and Japanese governments mean that they will still be relatively generous with their spending plans. Congress has passed the $1 trillion plus infrastructure bill and the equally large Build Back America plan is following close behind. The new Japanese administration is proposing another supplementary package, possibly worth about 4% of GDP, to offset the covid shock. Early signs are that the new German coalition will conduct a mildly accommodative fiscal policy, rather than being a hardliner.
The UK is a very open economy and hence sees similar growth and inflation trends. Several CBI surveys this week indicated that retail sales are good for the time of year, to the greatest extent since September 2015, while Britain’s factories are struggling to meet the highest demand since records began in 1977. Cost pressures are a common feature of such surveys and a worry to MPC members. The minutes of the Bank of England meeting on December 16th will be read with great interest for their signals about the pace of monetary tightening into 2022.
Andrew Milligan is an independent economist and investment consultant. This note is offered as general commentary on economic and financial matters and should not be considered as financial advice in any form.
Andrew Milligan an independent economist and investment consultant. From 2000-2020 he was the head of global strategy at Standard Life/Aberdeen Standard Investments, analyzing the major financial markets for global clients. He currently assists a range of organizations with reviews of their investment processes, advice on tactical investing and strategic asset allocation, and how to include ESG factors into their decision making