Market grows after US inflation and rescue package


The noise

  • Joe Biden sealed congressional approval on Wednesday for his $1.9tn Coronavirus relief package. The bill includes a new round of means-tested direct payments of up to $1,400 and passed through the US House of Representatives by the narrow margin of 220 to 211.

  • The US Consumer Price Index (CPI) rose 1.7% year-on-year in February, in line with expectations and below the Fed’s 2% target. The rise was largely powered by the rise in gasoline prices, although the slump in demand for services such as air travel meant that underlying inflation remained more moderate. In a debt-burdened economy where any action required to combat rising inflation would likely be painful for governments and businesses alike, it’s always good news to see that no action is required for now.

  • The UK economy shrank 2.9% month-on-month in January according to the ONS’s recent GDP report. UK exports of goods to the EU slumped by 40.7% in January, whilst imports from the EU into the UK also tumbled, falling by 28.8% in the first month of the new trade relationship, driven by a drop in imports of cars and pharmaceuticals.
     

The numbers

The-Numbers-18-2-21.PNG

 

The nuance

Thursday’s US inflation news was met with a sigh of relief by investors and central bankers alike. Another month of low price numbers means that the Federal Reserve can justify a continuation of its highly accommodative monetary policy stance. In response, the government debt sell-offs which have been a theme of recent weeks eased up and yields stabilised.

Perhaps unsurprisingly, the stabilisation of yields was taken by the market as a sign that the bull run can power onwards. The Nasdaq was up 5.5% over the course of the week in GBP terms, bouncing back from its 10% rout.

More good news for markets this week was the long-awaited US stimulus bill clearing its final hurdle and set to be signed by President Biden later today. Americans are to each receive a $1,400 cheque in the post via a “helicopter drop” mechanism, an initially a theoretical concept coined by economist Milton Friedman in 1969. So once this money hits bank accounts, where does it go next?

The usual suspects are in the spotlight here. One option is spending on goods and services as economies reopen and pent up demand is unleashed – the eventual consequence of this is further inflationary pressure. The other candidate in an era where retail investors now account for almost as much trading volume as mutual funds and hedge funds combined is of course: the stock market.

These dynamics are likely to provide further support for equity markets, although also demand discipline from those seeking to grow wealth over the long-term, as opposed to those looking to make a quick buck from buying Reddit’s flavour of the month.

 

Quote of the week

“Piers Morgan is not here this morning.”​
Susanna Reid, Good Morning Britain TV presenter

Like millions of Brits I rushed home from work on Monday to tune in to Harry and Meghan’s tell-all interview. Of course, it had already been leaked all over social media and therefore ended up being an exercise in confirming what we already knew. Frankly, nothing surprising. For a couple who have allegedly escaped the limelight of Royal life, Harry and Meghan didn’t appear particularly worry-free whilst Oprah interviewed with all the rigour and tenacity of a corgi. Piers Morgan presumably watched the whole affair with a firm grip on his stress ball and a sudden desire to throw some darts at the Meghan Markle dartboard in his living room.

Source: itv.com​

 

Phil Smeaton
Chief Investment Officer


All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

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