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LGT Navigator: Fed thinks a bit louder about interest rate turnaround

June 17, 2021

The Fed is continuing its expansionary monetary policy for the time being but is apparently thinking more strongly about a turnaround that is foreseeable in 2023. According to statements by Fed Chairman Powell, the corresponding debate on reducing the massive stimulus measures has begun. For the time being, however, the key interest rate in the US remains at a record low to lead the US economy out of the corona crisis in the long term. On Wall Street, the prospect of an interest rate turnaround by the Fed was naturally received rather negatively.

Fed thinks a bit louder about interest rate turnaround

The Dow Jones Industrial fell in the wake of the interest rate decision at times below the mark of 34'000 points and closed at 34'033.67 points -0.77% lower than the previous day. The broad S&P 500 fell by -0.54% to 4'223.70 points, while on the technology exchange Nasdaq the losses were somewhat smaller: the Nasdaq 100 now trades at 13'983.01 points (-0.34%). In the bond market, the yield of ten-year US government bonds climbed to 1.58%. The picture was similar in Asia this morning, and investor caution is likely to prevail on Europe's stock exchanges as well.

The Fed is still holding on to the crisis mode, but is cautiously preparing the markets for a turnaround

As expected, the Federal Reserve left its key interest rate unchanged in the range of zero to 0.25% and continues its securities purchases in the volume of USD 120 billion per month. In view of the rising inflationary pressure – the inflation rate in the US is now 5% – in conjunction with the strong recovery of the US economy from the corona crisis, however, the Fed is slowly but surely also considering a monetary policy turnaround. At present, economic forecasts are already signaling a turnaround in interest rates in 2023 – one year earlier than previously assumed. The Fed is now assuming even stronger economic growth in the current year at an annualized rate of +7.0% (previously +6.5%), but also a stronger rise in inflation.

SNB assessment – little room for maneuver

The Swiss National Bank (SNB) will announce its interest rate decision today at 09:30 (CET). Although inflation has also picked up in Switzerland, but remains moderate at +0.6% in May, and the risk of an undesirable strength in the Swiss franc is in the foreground, SNB President Thomas Jordan is unlikely to have much room for maneuver in monetary policy, especially as long as the ECB maintains its expansionary stance.

Inflationary pressure also continues to rise in the UK

As in other industrialized nations, the cost of living is also rising sharply in the UK. In May, consumer prices increased by +2.1% on an annual basis, which meant that inflation rose more strongly than expected and reached the highest level since mid-2019. In addition, the inflation rate thus also exceeded the Bank of England's target of 2%. Analysts had expected an average of +1.8%. In April, the inflation rate had still been +1.5% and in March even only +0.7%. Also, monthly, British consumer prices rose by +0.6%, twice as much as experts had forecast. The price level was mainly driven by higher prices for energy, fuel, and clothing.

Ifo lowers growth forecast for Germany

The Munich-based economic research institute Ifo expects weaker growth in Germany in the current year due to global supply bottlenecks. Ifo now forecasts GDP growth of +3.3%, compared with the previous forecast of +3.7%. On the other hand, next year's growth is expected to be correspondingly stronger at +4.3% (previously +3.2%), although this means that Ifo is even more cautious than the Bundesbank, which expects expansion of +5% in 2022. In its inflation outlook, the Munich-based institute holds out the prospect of an inflation rate of +2.6% this year, driven by higher energy prices. However, Ifo does not expect interest rates to rise soon.

Economic Indicators June 17

MEZ Country Indicator Last period
09:30 SZ SNB monetary policy announcement  -0.75%
10:30 SZ SNB press conference
11:00 EZ Consumer Prices (May, y/y) +1.6%
11:00 EZ Core Consumer Prices (May, y/y) +0.9%
14:30 US Philly Fed Manufacturing Index (June) +52.7
14:30 US Initial Jobless Claims (weekly) 376,000
16:00 US Leading Indicator (May, m/m) +1.6%

 

Earnings Calender June 17

Country Company Period
US Adobe Q2

 

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, +41 44 250 78 59, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

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