Key events in developed markets this week

The US focus will be on Wednesday’s FOMC meeting.

We do not expect any major new initiatives given the performance of financial markets and the fact credit continues to flow freely. Moreover, officials have made it clear they have no interest in negative rates, feeling it could actually impede credit flows, although they have not completely removed it as an option in the future.

Nonetheless, the outlook for the economy remains uncertain. There are certainly bright spots, such as mortgage applications and car sales, but social distancing, consumer caution, high unemployment and political division mean the broader economy is facing many challenges.

As Fed Chair Jerome Powell said last month, “the Fed has lending powers, not spending powers”. So in an environment where there is a collapse in demand with rising unemployment and state and local governments running out of cash, it requires the Federal government to step in. This means fiscal policy should carry the burden, potentially supported by a Fed QE strategy that would cap government borrowing costs as debt issuance surges. Yield curve targeting is unlikely to be seriously on the agenda at this FOMC meeting with longer-dated yields remaining low, but it could certainly emerge in the Autumn.

Data-wise consumer price inflation should continue to ease given the lack of demand in the economy. The food component is likely to see further price pressures though given the dramatic switching away from food services towards grocery and the strains this has placed on supply chains.

We will also have the University of Michigan measure of consumer confidence that should rise further given the re-openings and rising asset prices.