Bassanese Bites: Flying doves – August 31 2020
Continued generally encouraging U.S. economic data, further vaccine hopes and confirmation of an even more dovish Fed policy all conspired to support global equity markets again last week. The S&P 500 rose 3.3%, marking the 5th weekly gain in a row.
U.S. economic data continue to paint a picture of an economy gradually recovering from the COVID shock. The good news is that the latest wave of U.S. COVID cases appears to have peaked, with fewer deaths than earlier this year and less draconian restrictions. That said, weekly jobless claims have stopped declining in recent weeks and remain at an uncomfortably high level. Consumer confidence has also so far failed to rebound all that much, though confidence remains well up on the lows during the GFC and it has not stopped consumers from spending their stimulus cheques.
One lingering market worry is that the enhanced weekly unemployment benefit has been effectively halved in recent weeks from $600 to $300 (as failure of Congress to agree on a new arrangement has given way to stop-gap executive orders from President Trump) – though some tapering in stimulus as the economy gradually recovers, to my mind, is not that unreasonable or overly concerning.
The biggest news last week was the Fed’s confirmation of a new ‘2% average’ inflation target framework, meaning it is promising to tolerate inflation remaining above 2% for a period in the future to make up for the extended period it has been below 2%. Given the Fed’s failure to meet its inflation target for an extended period, talk of tolerating more than 2% inflation is purely academic – but, for markets, the bottom line of last week’s announcement is that it supports the idea the Fed will keep rates ‘lower for longer’ and so help underwrite high equity PE valuations. While longer-term bond yields did push higher last week, I strongly doubt markets are starting to fear higher inflation – rather it seems a case of ‘buy the rumour, sell the fact’ with regard to the Fed’s well-anticipated dovish announcement.