Lower for longer: Fed reasserts accommodative stance on interest rates

On a special, blog-only edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Head of Portfolio & Business Consulting Sophie Antal Gilbert discussed the recent high-level talks between U.S. and Chinese diplomats and the potential impact on markets. They also recapped the Fed’s announcement from its latest policy meeting and provided an update on the rollout of vaccinations in Europe.

High-level talks between U.S., China point to ongoing tensions

U.S. and Chinese government officials recently sparred during the first instance of high-level talks between the two countries since U.S. President Joe Biden took office, Ristuben said. “The acrimonious exchange between the world’s two largest economies is a confirmation of what markets had been expecting—that the fundamental tension points between the U.S. and China would not go away with the onboarding of a new U.S. administration,” he stated.

The March 18-19 meeting serves as a reminder that when conflicts emerge between the globe’s top two economies—a common occurrence throughout the course of history—they present exogenous risks that markets will have to factor in, Ristuben said. In most cases, these conflicts won’t have large impacts on overall performance, he noted, but on occasion there will be issues that flare up and can potentially cause market disruption.

“In the case of the U.S. and China, there are several real, legitimate issues between the two nations, which is why I don’t see tensions fading anytime soon,” he remarked. While Ristuben expects China-U.S. relations to be a source of market risk and tension going forward, he doesn’t believe they’ll amount to enough of a problem to override the generally optimistic expectations for the U.S. economy over the next few years.

U.S. Federal Reserve reaffirms easy-money policies

Shifting to the U.S. Federal Reserve (the Fed)’s recent policy meeting, Ristuben said that the central bank made it very clear that it will make no changes to its ultra-accommodative monetary policy until the data warrants it.

“The Fed has two goals: Maximum employment and 2% inflation over the long-run. Chair Jerome Powell noted in the post-meeting press conference that he expects any rise in inflation this year to be transitory—and therefore, not enough to meet the central bank’s new average inflation targeting standard that would trigger a consideration of rate hikes,” he explained. In a nutshell, the Fed essentially reasserted its pledge that interest rates will remain lower for longer at its March 16-17 meeting, Ristuben remarked, adding that the central bank’s statement is supportive for equity markets in particular.

However, markets remain concerned over the steady rise in U.S. government bond yields, he said, noting that the yield on the 10-year Treasury note climbed another 10 basis points the week of March 15. “While the jump in yields can be chalked up to a few factors, I think the number one reason is the recent passage of the $1.9 trillion U.S. stimulus package,” he stated. Ristuben added that the Fed’s announcement that it will end a rule that had relaxed capital requirements for banks during the pandemic may be a smaller, secondary factor behind the rise in yields.

Europe’s vaccination campaign hits another snag

Turning to Europe, Ristuben noted that the region’s vaccine rollout, which has lagged significantly behind both the U.S. and the UK, hit another recent bump with the temporary suspension by some countries of the AstraZeneca vaccine.

“Although administration of the vaccine has resumed after the European Medicines Agency declared it safe, following an investigation into reports of blood clotting, this could impact Europeans’ willingness to take it,” he said. Ristuben noted that initial polling by YouGov in December indicated that residents of European Union countries were less willing, in general, to receive a COVID-19 vaccine than their UK counterparts.

“Recently, as the rollout progressed, we’d seen a downward trend in the number of Europeans skeptical of getting vaccinated, but these newfound concerns over the AstraZeneca vaccine may cause things to swing the other way again—especially because most European countries rely more heavily on the AstraZeneca vaccine than on other versions,” he stated.

A further stall in the pace of vaccinations in Europe could have significant impacts on how quickly the region’s economy might reopen, Ristuben said, with implications for markets as well. “Hopefully, Europe will be able to recapture the momentum in its vaccination efforts as spring gets underway,” he concluded.

Editor’s note: Market Week in Review will return in its usual format on Friday, March 26.