21st September 2020
Cambridge Weekly Update
Taking a step back to look forward
Stock markets have stabilised and started trading sideways, in a sign of healthy consolidation following their extraordinary recovery rally since late March. Notably, the darlings of the recovery, namely US large cap tech and growth stocks, are no longer the leaders. This bodes well for a gradual sentiment shift among investors. Capital is no longer piling into the ‘fear trade’ that saw investors flocking towards apparently virus-proof businesses of our new virtual, digital, stay-at-home existence. Instead, investors are buying into the return-to-normality trade of the more physical parts of the economy, like manufacturing.
Brexit bother as Boris’s Mexican stand-off misfires
Having spent most of 2020 hoping things can get back to normal, Britain’s political news over the last couple of weeks has left us thinking ‘be careful what you wish for’. Stalling Brexit talks, political disarray and the potential for a full-blown constitutional crisis all created that familiar feeling of pre-pandemic times. Indeed, as if there was not enough déjà vu, parliamentary action even saw Ed Miliband standing in as leader of the opposition.
Can the Fed redress a 40-year imbalance between workers and savers?
Who does monetary policy work for? The simple answer is everyone, but given that one of the defining aims of a central bank is to ensure monetary and financial stability, perhaps a more historically accurate answer is savers (owners of financial assets). Through interest rates and other means, central banks hope to provide a stable monetary base and steady rate of inflation – thereby ensuring individuals’ savings maintain their value in the face of rising prices. Most monetary policymakers target inflation, but – unlike other central banks – the US Federal Reserve (Fed) has another objective in its ‘dual mandate’: ensuring full employment. Its explicit aim is to balance the needs of the US labour market and achieve stability in overall prices. As such, its monetary policy is supposed to work not just for savers but for workers too. Sometimes, though, one of the two goals will have to take precedence.