How will the Fed deal with rising US borrowing costs?
The minutes of the Federal Reserve’s latest monetary policy meeting will be released on Wednesday, giving investors a more in-depth look at the ongoing debates at the central bank over the path of the economic recovery and the recent rise in borrowing costs. in the USA.
The March meeting took place in a significantly improved economic environment. The $ 1.9 billion stimulus package adopted by the Biden administration has prompted a rethinking of the pace of the recovery, with economists dramatically increasing their forecasts for growth and inflation.
These revisions dampened investor appetite to hold US government bonds, pushing prices down. Yields, which rise as prices fall, have risen, with the benchmark 10-year note now trading around 0.1 percentage point below its 14-month high of 1.78%.
In addition to potentially providing more detail on the Fed’s sensitivity to rising borrowing costs, the minutes could reveal information about plans to raise rates to their all-time highs.
The central bank released its dot plot of interest rate projections last month, and although it has signaled it will not hike rates until at least 2024, more officials have forecast increases of interest rate earlier than at the December meeting.
The timing will largely depend on the way forward for growth and inflation, especially given the Fed’s new commitment to let inflation exceed its long-standing 2% target.
“The amount of fiscal stimulus absolutely increases the risk of a surge in inflation. . . but we also went through an extremely long period in which it was very difficult for the Fed to even meet its inflation target, ”said Greg Wilensky, head of US fixed income at Janus Henderson.
How well will the UK economy rebound?
The UK services sector, hampered by coronavirus-induced lockdowns for most of the past year, is expected to post a sharp increase in activity for March, building on earlier estimates and giving hope for a month April even brighter.
The latest IHS Markit Service Purchasing Managers Index figures for March, released on Wednesday, arrive just days before the April 12 reopening of non-essential stores, personal care services, indoor sports centers and from outdoor spaces to hospitality venues such as bars, pubs and restaurants across England. Services represent around 80 percent of the UK economy.
The latest figures – intended to reflect upward trends in non-standard economic measures – follow a sharp drop in January and a recovery in February during England’s third lockdown.
In March, visits to retail and entertainment venues were at half the average of February 2020 levels, down from 63% below average in January, according to data from Google Mobility. This matches the increase in credit and debit card spending published by the Office for National Statistics during the same period.
The consumer-led economic recovery expected in the spring is supported by an unprecedented amount of household savings accumulated during the pandemic, said Howard Archer, chief economic adviser at UK economic forecasting group EY Item Club.
He also underlined a leap in consumer optimism following the rapid deployment of the Covid-19 vaccine and the government’s announcement at the end of February of the roadmap for the reopening.
“On top of that, the job market is proving to be more resilient than previously thought at the start of the year,” said Archer. “We are on the verge of significantly increasing our current projection of 5% GDP growth for this year.”
Can the price of gold recover?
Gold had its worst quarter since the last three months of 2016, falling 10% after investors lost their enthusiasm for the precious metal.
This year’s decline came as rising bond yields and expectations of a pickup in US economic growth thanks to the $ 1.9 billion stimulus package made other assets more attractive.
Higher bond yields tarnish gold’s appeal as the metal provides no interest payments. Treasury yields have skyrocketed this year.
At the same time, vaccinations against Covid-19 are fueling hopes for a global economic recovery, which has boosted stock markets. This has shaken the attractiveness of gold as a safe haven asset.
“We expect demand for safe-haven securities to decline further this year, which should weigh on [gold] price, ”said Carsten Menke, research manager at Julius Baer.
Gold hit $ 1,678 an ounce last week, just above its year-round low of $ 1,677 an ounce on March 8. It finished last week around $ 1,730.
Adrian Ash, head of research at online precious metals retailer BullionVault, warned that it was only natural for gold to give up some of its earnings after a very strong year in 2020. Gold hit a low record above $ 2,000 an ounce in August due to a surge in purchases. gold-backed exchange-traded funds.
Investors could also be overly optimistic about the end of the pandemic, Ash added, which means gold could still play a role as a form of protection for investors.
“The markets are rushing to say it’s over – frankly, it’s not,” he said.