Central banks remain dovish with Bank of England unambiguously signposting a future move to negative interest rates
- The MPC left UK policy unchanged at their September meeting. The committee voted unanimously to leave rates on hold at 0.1% and the level of quantitative easing at £745bn. Until now, the economy has recovered quicker than was expected earlier in the year. The Bank of England indicated that should there be another downturn, they are in a better position to explore using negative rates, which markets took to confirm expectations of negative rates by early next year. The committee noted in the minutes that by the next MPC meeting in November, the full effect of COVID on the labour market will be clear as furlough will have ended, and the October European Council meeting will have provided more clarity on Brexit.
- In their last gathering before the General Election, the FOMC underlined their intention to hold rates steady until they ‘achieve inflation moderately above 2 percent for some time’. Whilst the time period that they will allow inflation to run above target is unclear, 14 of 17 participants’ “dots” projected that the fed funds range will be kept at 0 – 0.25% through the end of 2023. Asset purchases were left unchanged at a minimum pace of $120bn per month.
UK retail sales continue to recover but composition very different from pre-Covid
- UK retail sales rose +0.8% in August (previous: +3.7%), in line with consensus estimates. After four consecutive months of retail sales growth, volumes have now recovered from the ca 20% drop seen earlier in the year. The effect of lockdowns and social distancing have changed the composition of the index dramatically though, with non-store sales +38.9% year on year and food and home improvements providing +3.4% and +9.9% contributions respectively between February and August. The bulk of demand for online sales has come from replacement of high street retailer sales, which have seen clothing / textile volumes decline -15.9% over the same period.
Equity markets remain choppy and fragile with important technical levels giving way on US indices into the weekend
- After rallying over 80% and over 60% respectively from their lows, the Nasdaq and the S&P 500 both closed below the 55-day moving average within a day of each other, the first time this has happened since late February.
- The confluence of various short-term risk factors – threat of Chinese reprisals against US tech firms for the banning of TikTok and WeChat in the US, the increasingly close-run US General Election and the lack of additional stimulus from the Fed – as well as a certain natural market fatigue after several months of strong gains which have taken it to ostensibly overvalued levels, have left the equity market fractious and indecisive, and threatening to break to lower levels.
- Other “popular QE trades” such as long precious metals and short USD have also stalled. Credit spreads have come slightly off the tights but credit as an asset class has so far been relatively resilient in the face of rising equity market volatility.