Key events in developed markets next week

The US sees the Federal Reserve meeting, which will include updated Fed forecasts, retail sales and industrial production data. Fed Chair Jerome Powell's comments last week suggest the Fed is very much in a holding pattern and while the improved vaccine news and the reality of a 2Q reopening is likely to see GDP revised higher, little else is likely to change in terms of the statement or forecasts. The bank remains relaxed on inflation and that should see limited change in the dot plot diagram of individual forecasts for the Fed funds target rate and they are likely to bat away questions on tapering given the choppiness in bond yields. Risks do indeed remain, but these are fading and we still think the Fed will end up hiking rates before the end of 2023.

Meanwhile, retail sales and industrial production will be softer than January. Retail sales jumped 5% in January on the back of the latest $600 Federal stimulus payment for people earning less than $75k so there will almost certainly be a pull back from the that fact incomes will drop back. Meanwhile, the February winter storms will have deterred people from venturing out and with many left without power this will add to the downside risks. Industrial activity could also be impact by bad weather and associated disruption. Nonetheless, with a reopening around the corner and more stimulus on its way, the outlook for activity remains very positive.

• The economic outlook: The BoE’s February outlook could be described as ‘cautiously optimistic’, and there’s little to suggest that message will change. The vaccine programme is poised to double in pace from next week, potentially enabling all adults to receive a first dose by early June. Meanwhile, the extension of various support schemes in the latest budget should help limit the rise in unemployment this year. While we think the Bank’s view could turn out to be a little over-optimistic (they expect the economy to return to pre-virus levels around the turn of the year), it does suggest very little need to look at negative rates or a significant extension in the QE scheme later this year (a small boost is possible depending on market conditions).
• How worried is the MPC about gilt yields rising? Not very, seems to the be the short answer. Deputy Governor Ben Broadbent recently said that it would take ‘significant news’ for the BoE to adjust the pace of its QE purchases. That said, market pricing of future BoE rate moves has moved a lot in recent months, to the extent that investors are now pricing roughly two hikes over the next three years. Governor Andrew Bailey recently offered some tentative pushback here, explaining that the economic recovery is starting from a low level of activity. Unlike the Fed, we don’t think the BoE needs to be so worried about a breakout in inflation – though it’s fair to say there are a diverse range of views on this topic on the MPC.
• Will we get more detail on the ‘green’ mandate? The Bank is now formally required to support the economic transition to ‘net zero’, and has indicated the starting point will be the corporate bond purchase scheme. It’s probably too early to get details on this, but when the time comes we expect the Bank to target proceeds from maturing bonds in its portfolio more towards high-ESG scoring firms.