“The Federal Reserve Two-day Policy Meeting…”

Federal Reserve officials wrapped up a two-day policy meeting on Wednesday.   The Federal Reserve repeated its pledge to keep its target interest rate near zero for years to come after projecting a rapid jump in U.S. economic growth and inflation this year, as the COVID-19 crisis lessens. The U.S. central bank now sees the economy growing 6.5% this year, which would be the largest annual jump in gross domestic product since 1984, and the unemployment rate falling to 4.5% by year end.  That compared with projections in December of 4.2% GDP growth and 5% unemployment.  The pace of price increases is now expected to exceed the Fed’s 2% target for the year, hitting 2.4% by year end before falling back in 2022.  “Indicators of economic activity and employment have turned up,” the central bank’s policy-setting Federal Open Market Committee said in a statement that kept the benchmark overnight interest rate in a target range of zero to 0.25%. Fed Chair Jerome Powell said the worst economic outcomes that could have arisen from the pandemic had been avoided thanks to aggressive support from the federal government and the central bank.  But he stressed the rosier outlook did not mean the Fed would now remove its support for the economy, with the nation still 9.5 million jobs short of where it was before the initiation of COVID-19 and inflation below the Fed’s target.  In a news conference referring to the 2021-2023 timeframe Jerome Powell said, “The strong bulk of the committee is not showing a rate increase during this forecast period.”

US Retail Sales

U.S. retail sales fell more than expected in February due to the cold weather across the country however consumer spending is likely to rebound amid the pandemic relief money by the government to mostly lower and middle-income households.  The harsh weather has also affected production at factories last month as the deep freeze in Texas and other parts of the South put some petroleum refineries, petrochemical facilities and plastic resin plants out of commission. Retail sales dropped by 3% last month according to the Commerce Department.  Data for January was revised up to show sales rebounding 7.6% instead of 5.3% as had been previously reported.  The declines were led by motor vehicles, clothing stores, restaurants, and bars.

US Homebuilding

U.S. homebuilding dropped to a six-month low in February due to severe cold weather in many parts of the country.  The report from the Commerce Department on Wednesday also showed a sharp decline in building permits last month. It followed on the heels of data this week showing that the deep freeze, which was most severe in Texas and other parts of the densely populated South region, depressed retail sales and output at factories.

Market Wrap

Wall Street climbed on Monday, with the Dow hitting an intra-day record high, as investors awaited any decisions from the Federal Reserve in the midst of rising borrowing costs by the massive fiscal stimulus.  The S&P 500 also was on track to close higher, lifted by a 1.85% increase in Apple.  Delta Air Lines, Southwest Airlines and JetBlue Airways said leisure bookings are on the rise and offered some of the first concrete signs that the worst may be over for the airline industry. Travel related stocks such as Carnival, Wyann Resorts and MGM Resorts gained between 2% and 5%. The yield on benchmark 10-year Treasuries climbed 1.6% below its 13-month peak of 1.64% on Friday.  Recently Wall Street faced a spike in longer-dated US bond yields due to fears of an increase in inflation.  US Treasury yields were lower on Monday in line with Europe and ahead of the central bank meetings.  On Monday Germany, France and Italy said they would suspend AstraZeneca COVID-19 shots after several countries reported possible serious side-effects, but the World Health Organization (WHO) said there was no proven link and people should not panic. 

The S&P 500 hit an all-time high on Tuesday while the Nasdaq climbed about 1% as technology stocks gained ahead of the Federal Reserve’s two-day policy meeting.  The Nasdaq was at a two-week high extending a rebound in tech-related stocks that experienced a sell-off in February.  The index is now about 4% below its 12 February record closing high.  London’s FTSE 100 inched higher on Tuesday, as a weaker pound boosted shares of exporters and a set of positive earnings updates helped lift confidence in the economy’s recovery.  Amongst the sectors that were on the rise were healthcare, financials, and consumer staples stocks. 

European stocks stood flat on Wednesday as most investors stayed on the side-line awaiting the US Federal Reserve’s policy decision. Meanwhile the German carmaker BMW jumped after forecasting significant profit growth in 2021.  The pan-European STOXX 600 index edged 0.02% lower in early trading, tracking a cautious mood in Asian markets. The US central bank’s policy statement and economic forecasts were due at 1800 GMT and was closely watched.  British shares slipped on Wednesday due to miners and energy stocks, as investors awaited the outcome of the US Federal Reserve policy meeting to get cues about interest rates.  The FTSE 100 rebounded more than 38% from a coronavirus motivated crash last year, but the pace of gains has slowed recently amid fears that the vaccine-led economic recovery could lead to higher inflation.  Euro zone bond yields inched higher following U.S. Treasuries ahead of the U.S. Federal Reserve meeting.  Meanwhile U.S. benchmark Treasury yields ticked up in early London trade, nearing recent 13-month highs. The benchmark 10-year Treasury note yield which surged to 1.689%, the highest level since January 2020, ahead of the Fed’s statement, had dipped to 1.640% by late afternoon. The S&P 500 and Dow Jones Industrial Average closed at record highs on Wednesday after the Fed predicted a fast economic recovery from the coronavirus pandemic and said it would maintain its interest rate at close to zero.

Currency Roundup

On Monday sterling fell again amid the recent increase in US Treasury yields and as the European Union launched legal action against the unilateral British changes to the Northern Irish trading arrangements.  The European bloc sent a letter of formal notice to kick-start an “infringement procedure” as Brussels said the changes to arrangements breach the Brexit deal signed last year. The pound was down 0.6% at $1.3885 after touching a three-session low of $1.3854. Adding pressure to the pound was a sell-off in Treasuries, which pushed the yield on the benchmark note above 1.6% since Friday, strengthening the dollar.   The dollar gained for the third straight session on Monday as traders cut their bearish bets on the currency to four-month lows due to the recent increase in US Treasury yields.  They were also cautious ahead of the FED policy meeting later in the week.  The gains in the dollar were pronounced against the euro and the sterling, while high yield currencies like the Australian dollar did relatively better. 

On Tuesday sterling dropped against both the euro and the dollar as Germany, Italy and France suspended the AstraZeneca COVID-19 shots due to safety fears dampening the excitement in the UK over its rollout of the vaccines.  Sterling fell 0.6% versus the dollar to a one-week low of $1.3817.  Against the euro, it was 0.6% lower at 86.40 pence, touching its lowest level since March 5. Meanwhile, the UK said it had no concerns.  Sterling has gained more than 4% against the euro in the past three months and more than 2% versus the dollar amid hopes for a relatively fast economic recovery following a speedy vaccination programme and declining numbers of COVID-19 cases in Britain.   There was a cautious tone in  currency markets on Tuesday before the initiation of the US Federal Reserve two-day monetary policy meeting.

Bitcoin

Bitcoin dropped sharply on Monday after hitting a record high of $61,781.83 over the weekend as US President Joe Biden signed off the $1.9 trillion fiscal stimulus and ordered an acceleration in vaccinations.  The rise in Bitcoin also came about at the same time as the ten-year US Treasury yields hit a 13-month high of 1.64% on Friday.  Bitcoin is perceived by many as a hedge against inflation and its rise has been helped by the prospects of a steep economic recovery.  The drop in the bitcoin might have also came about by a Reuters report that India would pursue a ban on digital assets contrary to the likes of Goldman Sachs, Blackrock and Tesla’s Elon Musk.   

Oil

Oil prices dropped on Monday, drawing back from earlier gains due to strong Chinese economic news and on concerns about potential U.S. tax increases to pay for infrastructure spending. As major oil producers restrained the supply of oil and the vaccine rollouts goes faster, crude benchmark have climbed steadily throughout 2021.   China’s industrial output growth quickened in January-February, beating expectations, while its daily refinery throughput data rose 15% from the same period a year earlier, data showed.  The Organization of the Petroleum Exporting Countries and its allies (OPEC+) decided earlier this month to extend most of its supply cuts into April. The massive US stimulus pack that passed this month raised the prospects for global economic growth but also inflation.  Oil prices dropped on Tuesday extending the declines to three consecutive days as rising stockpiles in the US added to the risks of a demand recovery after some countries in the EU halted the COVID-19 vaccinations.  Brent crude dropped by 1.5% lower at $67.85 while US crude was down 1.4% at $64.43 a barrel.  Oil slipped for a fourth day on Wednesday as concerns about weaker demand in Europe outweighed an industry report that showed U.S. crude stockpiles unexpectedly fell last week. Brent crude fell 66 cents, or 1%, to $67.73 a barrel whilst U.S. West Texas Intermediate (WTI) crude dropped 42 cents, or 0.7%, to $64.38.  Oil prices are unlikely to mount a dramatic and sustained surge despite vaccines expected to boost demand later this year, the International Energy Agency (IEA) said on Wednesday.  “For a start, oil inventories still look ample compared with historical levels despite a steady decline … On top of the stock cushion, a hefty amount of spare production capacity has built up as a result of OPEC+ supply curbs,” it said.

Malta:  Harmonised Index of Consumer Prices (HICP): February 2021

A press release dated 17^th March by the National Statistics Office, in February 2021, the annual rate of inflation as measured by the HICP was 0.1 per cent, down from 0.2 per cent in January 2021.   The largest upward impact on annual inflation was measured in the Recreation and Culture Index (+0.08 percentage points), while the largest downward impact was recorded in the Transport Index (-0.14 percentage points).

Malta: International Economic and Financial Transactions: Q4/2020

In a press release dated 16^th March by the NSO, during the fourth quarter of 2020, Malta registered a current account deficit of €89.8 million. Provisional figures for Malta’s external transactions show that during October-December 2020, the current account balance recorded a deficit of €89.8 million, as compared to a surplus of €255.4 million in the comparable quarter of 2019. This deficit was primarily the result of negative net balances recorded in the goods account (€285.4 million), the primary income account (€331.8 million) and the secondary income account (€34.7 million). This was partly offset by a positive net balance of €562.0 million recorded in the services account. During the last quarter of 2020, the capital account registered a positive net balance of €3.4 million, €9.5 million lower than the figure recorded in 2019. The financial account was shaped by net asset decreases of €69.1 million, an increase in the balance of net assets of €151.2 million when compared to the value recorded in the same quarter of 2019. The development in the financial account balance was mainly brought about by a negative net asset balance recorded in direct investment (€2,424.4 million). This was partly offset by positive net asset balances in portfolio investment (€1,368.9 million), other investment (€913.7 million) and financial derivatives (€57.5 million). Reserve assets increased by €15.2 million during the same period. 

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