Eyes turn to Federal Reserve outlook

The Federal Reserve takes centre stage later, with investors on high alert for any changes in outlook.

Article updated: 16 June 2021 8:00am Author: Richard Hunter

The accompanying comments from the Fed meeting will be closely scrutinised, with further evidence of a strengthening recovery and inflationary pressures guiding the next steps. At some point, there will need to be a signal that the currently easy monetary conditions will be scaled back. The expectation is that the subject of tapering some of the relief has at least made its way to the table for discussion, if not immediate action.

This will follow on from the latest set of data, showing another spike in wholesale inflation and a drop in retail sales which was more than anticipated. The increasing success of the vaccination programme and therefore the mobility of the population is being reflected in a move towards spending on services and away from goods, as consumers look to spend in public rather than in private.

As investors hold their breath for the latest development, markets were slightly weaker but still comfortably ahead in the year to date, with the Dow Jones having risen by 12%, the S&P500 13% and the Nasdaq 9.2%.

The anticipation of strong recovering demand against restricted supply put a further fire under the oil price, which has now risen by 44% in the year to date. As economies in the US, Europe and Asia move back to growth, the rise is also underpinned in the meantime by falling supplies and output restraints which are seen as being likely to remain in place for the time being.

This factor contributed to UK inflation jumping higher to 2.1%, above the Bank of England’s target and also ahead of expectations of a rise to 1.8%. The Bank remains in agreement with the Fed that the rise is of a temporary nature, although the figure could get higher before receding. In the meantime, the stronger reading is unsurprising given the comparison with May 2020, when lockdown was in full force, as well as the strength of fuel prices.

With the current restrictions being extended for several weeks, there has been some weakness in sterling as well as the sectors which are most likely to suffer further. However prudent the government’s decision proves to be, it nonetheless taps the brakes on what had been an accelerating UK economic recovery.

The slight drop in the pound has allowed the premier index to nudge higher and draw level with the more domestically focused FTSE250. In the year to date, both the FTSE100 and the 250 are ahead by 11%, with investors searching for the next positive catalyst as the uneven global recovery unfolds.

More from Richard Hunter: read more articles directly on the interactive investor website.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Richard Hunter

Head of Markets, interactive investor

Richard has over 30 years of stockmarket experience and is one of the UK’s foremost commentators on market matters and a regular contributor for the BBC (BBC News Channel, Wake Up to Money and the Today Programme), CNBC and Bloomberg. Richard’s expert commentary also appears across the national and specialist press. He previously held senior positions at Hargreaves Lansdown and NatWest Stockbrokers.

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