By Scotia Wealth Management - The Zukiwsky Group

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MARKET WATCH: March 19, 2021

Mar 19, 2021 | 1:14 PM

Big Picture

U.S. Fed maintains it outlook

The U.S. Federal Reserve drove the narrative this week as it confirmed a brighter economic outlook at its policy meeting Wednesday, while stressing it’s too early to loosen monetary policies. The balancing act comes amid heightened expectations that scores of U.S. stimulus, improving economic data and mass vaccinations will increase inflation and result in a jump-forward in interest rates. Rising growth expectations are evidenced in 10-year Treasury yields which ticked higher following the Fed’s two-day policy meeting. Higher interest rates on safe-bonds make stocks less attractive, particularly high-growth technology names. Over the past six weeks, the 10-year U.S. treasury yield has risen from 1.07% to over 1.7% on Thursday, despite the Fed forecasting no interest rate hikes until 2023.

Turning to U.S. economic data, the number of people filing for unemployment benefits rose to 770,000 the week ended March 13, up from 725,000. While jobless claims have fallen from their peak last year, they remain at historically high levels; a key reason the Fed says it will support financial markets until the economy fully recovers. Retail sales – the other notable print south of the border – fell 3% in February compared to January. February is typically a slow month for sales as stores gear up for spring while bad weather may also have weighed on sales. Turning to China, economic activity surged in the first two months of the year compared to the same coronavirus-battered period last year. Data released on Monday showed industrial production, consumption, investment and home sales jumping by more than 30% yoy. Beijing has set a modest growth target of 6% for 2021. In the U.K., the Bank of England met on Thursday, with bankers making no change to its huge, crisis-fighting stimulus program. The bank stood pat despite optimism that tough pandemic restrictions could be lifted sooner than thought as Britain expects to vaccinate half of all adults in a few days.

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Most major North American stock benchmarks ended the week lower for the four days covered in this report. The tech-heavy Nasdaq fell 203 point to end Thursday at 13,116, the S&P 500 shed 28 points to close at 3,915 and the TSX dropped 15 points to finish at 18,836. The Dow was the only winner for the week, and was up 84 points to end Thursday’s session at 18,836.

Strategy

The Fed’s dovish stance is here to stay as policymakers prepare to look through transient inflationary pressures.

The outcome of yesterday’s Federal Open Market Committee (FOMC) meeting was in-line with our expectations and proved to be precisely what the market was hoping to hear. Equity markets rallied with the release of the policy statement and held their gains throughout the press conference as the suite of communication pushed back against earlier-than-expected rate hikes. Understandably, the market doubted the Bank’s commitment to the new framework of inflation targeting and full employment, but the Committee, and Chairman Powell’s press conference performance, showed steadfast resolve. In his opening remarks, the Fed chief directly addressed the Bank’s expectation for inflation to briefly drift above the 2% target rate, boosted by favourable base level comparisons and potential supply-side bottlenecks, saying they expect the move to be transient and that it will take “some time” for substantial progress to be made before a rate hike can be comfortably undertaken. Further, in discussing the build-up of excess cash and pent-up demand, Mr. Powell outlined that the release is a one-time, transient factor contributing to the brief periods of above-target inflation in the middle months of the year but downplayed their effect on building sustainable inflationary effects.

The FOMC released an updated edition of their Summary of Economic Projections, which showed a significant mark-up to 2021 GDP growth expectations, up to 6.5% from 4.2%, while the projected unemployment rate fell 0.5 percentage points (ppt) to 4.5%, and core PCE inflation expectation reaches 2.2%, up from 1.8% in December. Further out the forecast horizon, revisions were more modest and generally reflected the Fed bringing forward growth and labour market recoveries to 2021. The Dot Plot’s central tendency was unchanged, though there were members who saw higher rates in 2022 and 2023. We would highlight that the average expectations among members are for GDP growth of 6.5%, 4% unemployment, and core inflation of 2.2% in 2021, but no rate hike is penciled in until at least the end of 2023. The Fed is telling the market very clearly it is committed to the new framework and early actions are unlikely. On the topic of asset purchases, Chairman Powell stated that the current pace and composition were appropriate. We expect tapering discussions will begin late this year, with eventual action taken in early 2022.

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