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LGT Navigator: Bank of England defines a roadmap for tapering

August 6, 2021

The Bank of England is sticking to its expansionary monetary policy for the time being, but is defining a roadmap for exiting bond purchases. Investors are eagerly awaiting the US labor market report today, which is expected to give further indications of the Federal Reserve's monetary policy course. Meanwhile, the US trade deficit is reaching record levels.

Bank of England

US stock markets have made strong gains on Thursday. The blue-chip barometer S&P 500 has gained +0.6% and reached a new all-time high with a closing price of 4429.10 points. The Nasdaq Composite advanced +0.8% to 14’895.12 points, also recording a new high. The Dow Jones climbed +0.8% to 35’064.25 and closed just below its current peak. 

The focus today lies on the monthly labor market report, which should provide information about how quickly the recovery of the US economy is progressing. According to Bloomberg, economists expect the economy to have added 870’000 jobs in July, following a job gain of 850’000 in the previous month. The unemployment rate is forecast to fall to 5.7% from 5.9%. A strong labor market report is likely to intensify the discussion about the exit from the ultra-loose monetary policy of the Federal Reserve. Fed chairman Jerome Powell had stated on Wednesday after the interest rate meeting that the employment situation must improve before the central bank initiates a monetary policy change. 

On the Asian stock exchanges, the zigzag course continues on the last trading day of the week. The Nikkei gains +0.3% on Friday. In Hong Kong, the Hang Seng trades slightly weaker with -0.1% and the Shanghai Composite loses -0.4%.

BoE defines roadmap for tapering

The Bank of England (BoE) is sticking to its expansionary monetary policy for the time being despite rising inflation and left the key interest rate unchanged at 0.1% on Thursday. It is also sticking to the volume of the current bond-buying program of GBP 895 billion. The BoE continues to assume that inflation will remain only temporarily elevated and expects it to climb to 4% by the end of the year. In May, it had forecast inflation to rise to 2.5%. In June, consumer prices rose +2.5% year-on-year – the strongest growth since August 2018 – putting inflation well above the central bank's target of 2%. The economic recovery and the scarce availability of raw materials are responsible for the upward pressure on prices. However, the BoE also signaled on Thursday that it is considering curbing bond purchases (tapering). The roadmap forsees to reduce the volume of purchases when the key interest rate is at 0.5%. In a first step, the funds from maturing bonds will no longer be reinvested. A sale of the bonds is to be considered only when the key interest rate has risen to at least 1%.

In the UK, more than 70% of adults are now fully vaccinated and the majority of protective measures have been lifted. The British economy has almost recovered from the economic slump in the wake of the corona crisis. However, the spread of the delta variant is now causing new uncertainty. 

US reports record trade deficit

The US trade deficit widened to a record level in June due to rising imports. Imports exceeded exports by USD 75.7 billion, the Commerce Department. As a result, the deficit widened +6.7% from the previous month. In the process, imports of goods rose +1.8% to a high of USD 239.1 bn as numerous companies apparently filled their inventories to meet expected growing customer demand. Exports rose by only +0.2%, but also reached a record level. The International Monetary Fund (IMF) is now forecasting economic growth of 7% for the USA this year. In April, the forecast was only 4.6%.



Economic Indicators August 6

08:00 GE Industrial production (June) -0.3%
14:30 US Non-farm payrolls (July) +662'000


Earnings Calender August 6

Country Company Period
GE Allianz Q2
NL ING Group Q2


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