The most important economic event of the month took place last week – the Federal Open Market Committee meeting. The FOMC is a committee within The Federal Reserve System that is in charge of determining the level of interest rates and money supply in the US. The committee meets 8 times during the year and their policy updates, as well as the minutes that are released three weeks later, are always closely scrutinized by market participants.
This particular meeting was widely anticipated as the Fed was expected to elaborate on their newly implemented Average Inflation Targeting policy which was announced during the Jackson Hole conference. The main takeaway was the updated language around employment level targeting since unemployment levels have reached a record high during corona crisis – around 25-30 million Americans are still unemployed. As the Fed carries a dual mandate of achieving stable prices (which is inflation rate) and ensuring maximum sustainable employment, they gave themselves more leeway to traverse the two – namely, going forward we should not expect the Fed to raise interest rates once we reach full employment. For background – the Fed had been incorporating a concept called the Phillips curve that states there is an inverse relationship between unemployment levels and inflation. This means that with low levels of unemployment, inflation is expected to be high. This concept has been proven wrong in recent history – unemployment was below 4% between 2018 and 2020, yet inflation, measured as CPI, was nowhere to be seen. We read from this statement that employment data will not carry the same level of significance in determining the interest rate levels, as it has in the past. Also, interest rates are expected to stay low for the next 3 years. Lastly, the Fed mentioned that they expect economic growth to reach pre-pandemic levels by the end of 2021.
US retail data published last Wednesday was quite disappointing, especially in the context of a positive retail data coming from China. August retail grew only 0.6% (vs 1.0% expected) and July’s numbers were revised down to 0.9% (from 1.2%). The losers were sporting goods and book stores (-5.7% compared to July 2020), food and beverage stores (-1.2%), and general merchandise stores (-0.4%). The main winners were food services and drinking places (+4.7%), clothes and accessories stores (+2.9%) and building material and garden suppliers (+2%). Compared to one year ago, August 2019, when the main winners have been building materials (+15.4%), food and beverage stores (+10%), online shopping (+22.4%) and sporting goods and hobby stores (+11.1%). The main losers compared to 1 year ago have been gasoline stations (-15.4%), clothing and accessories (-20.4%), departments stores (-16.9%) and restaurants (-15.4%). Definitely reflective of the Work-From-Home trend! We are looking out for US existing and new home sales data that is published this week on Monday and Thursday respectively, in order to gauge the situation and sentiment of US consumers.
Have a great trading week ahead!