Market Update

This week's Federal Reserve monetary policy meeting resembled an underwhelming party - disappointing, yet hard to pinpoint the exact reason. Consequently, after a promising start, global equity markets reversed course and ended the week marginally lower.
We have consistently argued for persistently low interest rates in the foreseeable future. It was reassuring to note that the US Central Bank pledged to keep US interest rates near zero for at least three years, even with strong economic growth projections. The Fed made this commitment after modifying its inflation target from 2% to an average of 2%, allowing for temporary overshooting to compensate for periods below 2%. Despite the improved performance of the US economy in terms of GDP, unemployment, and inflation, the Fed refrained from further monetary stimulus, putting the onus on Congress to provide fiscal support. However, the current deadlock between Republicans and Democrats makes significant fiscal stimulus before the November 3, 2020, US Presidential elections increasingly unlikely.
What caught our attention was the Fed's condition for raising US interest rates: inflation must exceed 2% while achieving maximum employment. Achieving both targets simultaneously within the next three years seems daunting, and we wouldn't be surprised if the Fed's 2023 interest rate increase projection turns out to be overly optimistic. This continuity of loose monetary policy bodes well for global equity markets, considering that after the 2008/2009 global financial crisis, US interest rates remained unchanged for seven years.
Similarly, the Bank of England (BoE) meeting on Thursday, September 17, 2020, lacked significance. While it was expected that the BoE would maintain interest rates at 0.1% and its £745 billion QE (asset-purchase) program, we anticipated stronger stimulus signals, especially after the sharp drop in UK CPI inflation from 1.0% in July to 0.2% in August. Although a slight rebound in September inflation is predicted, the overall subdued inflation suggests a potential BoE move toward negative interest rates by the end of the year, benefiting equity markets with a dovish policy shift.
In the US, jobless data indicated a continuing economic rebound, with initial jobless claims dropping by 33,000 to 860,000, and continuing claims decreasing by over 900,000 to 12.63 million. The US economy has now recovered approximately half of the jobs lost due to the coronavirus lockdown. Additionally, the University of Michigan sentiment index on Friday, September 18, 2020, showed a six-month high in US consumer confidence, reflecting optimism about the country's economic prospects.
In the upcoming week, key points of interest include PMI data from the US, UK, and Eurozone, US mortgage applications, home sales, and weekly jobless claims data. Both the UK and Eurozone will be closely watched for further economic indicators.