Welcome to your weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last week.
US Federal Reserve announces tapering of asset purchases
The Fed announced that it would begin to scale back, or ‘taper’, its asset purchase programme this month from its current level of $120bn a month. The decision was widely expected and a culmination of months of communication from the central bank as it weighed the strengthening economic environment alongside higher than expected inflation. The tapering process will start from the middle of November and run until June 2022. The Fed committee said that the asset purchases would fall by an increasing monthly rate over the tapering process but maintained that it was prepared to “adjust the pace” of tapering if necessary.
In other news from US policymakers, the long-awaited US infrastructure bill was approved by the House of Representatives. The $1tn bill was hailed by President Joe Biden as a “monumental step forward” but the delay and Democrat infighting over the recent months highlight the difficulties facing the government. The spending will target a broad range of US infrastructure projects, including rail networks, electric vehicle charging points and high speed internet.
Bank of England surprises market by keeping interest rates on hold
The UK central bank’s monetary policy committee voted 7 – 2 in favour of holding the Bank Rate at 0.10%. Market participants had expected a reversal of the 0.15% emergency rate cute that was implemented at the outset of the pandemic last year. The market was surprised by the lack of support for a rate hike, especially considering the hawkish rhetoric from the members of the BoE in the past month which has tended to focus on the risk of rising medium-term inflation expectations in response to higher inflation. The yield on 10-year gilts fell sharply on the news, from 1.05% to below 0.85% at one stage.
Despite the dovish vote, there were some hawkish comments that add a further level of uncertainty. BoE Governor Andrew Bailey commented that the labour market was strengthening in line with expectations and that a rate rise “will be necessary over the coming months”.
US jobs growth picked up in October, adding 531,000 jobs
The US economy added 531,000 jobs in October, well in excess of the 450,000 jobs that were expected by economists. This follows two months of disappointing growth in the jobs market, with many employers struggling to fill open vacancies as COVID-19 concerns left workers side-lined. The easing of these concerns led to gains in October, particularly in the leisure and hospitality sector, which added 164,000 jobs. This leaves the unemployment rate at 4.6%, down from 4.8% a month earlier. However, compared to the pre-pandemic level there are 4.2 million Americans that remain out of work, while unfilled job vacancies remain well above normal levels.
Markets
Central bank meetings were the defining factor for markets last week. In the UK, an unexpected dovish tilt by central bankers surprised investors, leading to the largest single day contraction in government bond yields this year.
In the US, a well signalled move to taper asset purchases was met with muted response in fixed income markets, while US equities marched on to make new all-time highs, buoyed by a stronger than expected earnings season. When viewed relative to the rest of the world, US equities have now outperformed by 240% in the last 10 years.
Look out for next week’s update, where we’ll be focusing on US inflation and China’s 6th Plenum.
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