Market Overview – 11/08/2021

Stronger than expected employment numbers from the US on Friday confirmed that despite the onset of the new Covid variant, the economy continues to recover. In parallel of course is the increasing proportion of the population being vaccinated, which serves as a partial offset to the continued spread of the virus. Close to a million new jobs were added in July and the unemployment rate fell to 5.4%. Nevertheless, there are still nearly 6 million more Americans out of work than in February 2020, just before the virus went global. The market reaction pushed US stocks to a fresh all-time high. Bond prices fell, however, with the benchmark 10 year Treasury yield rising to nearly 1.3%. Although the Federal Reserve is still in a wait and see mode with regard to any tightening of policy, a few more numbers like Friday’s will certainly have the market speculating about potentially earlier than expected tapering of the bond purchasing programme.

By contrast, the Bank of England was a little more forthcoming last week about its timetable for flexing monetary policy. The bond purchasing programme is expected to complete around the end of this year, when annual inflation will peak at around 4%. Along with most central banks, this inflation spike is deemed to be temporary and will gradually move back towards the target level of 2%. However, the monetary policy committee did say that some modest tightening of policy is likely to be necessary over the next two years to keep inflation under control. It went on to say that it would stop reinvesting the proceeds of maturing bonds when rates reached 0.5% and would start selling bonds when borrowing costs hit 1%. It is worth bearing in mind however that the timescales of these moves stretch well into the future, with the first interest rate rise to 0.25% priced in for August 2022, with any subsequent moves in 2023/4.