Halyard’s Weekly Wrap – 11/05/21

This was supposed to be the week that the Fed, the Bank of England and, to a lesser extent, the ECB eased off the accelerator of monetary policy. As communicated for several months now, Chairman Powell announced that the Fed would begin to taper open market purchases in the amount of $15 billion per month. At the post-meeting press conference, which is typically a non-controversial “softball” affair, the tone of the Q&A got a bit confrontational. Powell reiterated repeatedly that the Fed was in no way prepared to raise the Fed Funds rate. After driving home that point, the line of questioning turned to the trading scandal that cost Fed Presidents Kaplan and Rosengren their jobs. We had thought the matter had been put to bed but apparently the media didn’t get the memo. Powell was put through the rhetorical wringer with questions like how he’d restore the confidence of the American people and if he felt the new policy went far enough. He got through those questions with an even tone, but when asked if the trading scandal would hurt his chances for Biden to renominate him and for Congress to approve his approve his nomination, there was decidedly a bit of annoyance in his “I’m not going to answer that question” response. Otherwise, investors were delighted that a rate hike is not contemplated anytime soon, as witnessed by the simultaneous rally in stocks and bonds to close out the week.

The Bank of England, on the other hand, didn’t follow the Fed lead of doing exactly what they said they were going to do. The BOE had bond traders prepared for a rate hike on Thursday, but instead decided to leave the rate unchanged by a vote of 7 to 2. The yield on the 2-year Gilt fell 30 basis points on the stunning lack of action. Not surprisingly, the English Central Bank lost an enormous amount of credibility and with it, the ability to “jawbone” the market; a useful tool to persuade markets to move at their will.

The European Central Bank continued to parrot the transient inflation theme, offering no end to the emergency monetary policy mantra.

The equity market indices of all three locales closed at or near all-time highs.

Of course the biggest news of the week was the stunning rebuke of Democrats at Tuesday’s election. What concerns us is the implication that may have on the debt ceiling which is set to be reached in about a month. The Republicans are unlikely to want to give the Democrats a win by postponing the cap again. That could be problematic for the markets, especially with the yearend rapidly approaching.

Next week the focus will be on the Producer and Consumer price indices, and neither are expected good news on inflation.