Northern Trust Asset Management Monthly Market Commentary for September 2021 - Exclusive Insight for TMI Subscribers
Eurozone Market Update
At September's monetary policy meeting, the European Central Bank (ECB) unanimously voted to leave interest rates and forward guidance unchanged. They also recalibrated the purchases in the Pandemic Emergency Purchasing Programme to a “moderately reduced pace” in the fourth quarter relative to the prior two quarters. There was no change in forward guidance on the Asset Purchase Programme, with which the Bank still plans to continue making net purchases until “shortly before it starts raising … interest rates”. The ECB remains dovish relative to the Federal Reserve and Bank of England (BoE). The ECB’s inflation outlook in 2023 at 1.5% and five-year/five-year swap rate at 1.75% indicates loose monetary policy continuing beyond the expiration of programmes in 2022.
UK Market Update
This month, the BoE’s Monetary Policy Committee unanimously agreed to keep the base rate unchanged and voted 7-2 to maintain the quantitative easing (QE) programme. Comments on inflation were somewhat hawkish, as the BoE expects it will go above 4% and remain there into Q2 2022 before falling back to 2% in 2023. The market viewed the minutes as hawkish, moving forward pricing for rate hikes. The first 15bps hike is now priced in for March 2022, with an additional 25bps hike for September 2022 to take the base rate to 0.50% (see Chart of the Month). Issuer levels echoed this movement higher, with the six-month issuance rates up 4bps and the one-year rate up 8bps. Despite this, general investor activity remained subdued due to quarter end constraints.
US Market Update
The Federal Open Market Committee's monetary policy was unchanged in September, but it strongly hinted a QE taper will be announced in November. The Fed’s dot plot showed 50% of the members expect at least one hike by the end of 2022, with the median rate projection at 1% at the end of 2023 and 1.75% by the end of 2024. The timing and speed of the taper was more hawkish than the market had expected, which moved up expectations for the first rate hike to early 2023. This has led to a selloff in Treasuries and a significant increase in volume placed at the Fed’s overnight reverse repo facility, which hit an all-time high of $1.6 trillion on September 30.
Global Outlook
This should be a quiet month for any changes from the central banks, as only the ECB is meeting. The ECB has already indicated announcements on monetary policy for 2022. Anything beyond that will be communicated in December, so we expect ECB communications in October to be consistent with the September meetings. The market will be focusing on the employment data in the U.S. at the beginning of October, which may influence the Fed’s decision to announce the start of tapering in November. We continue to believe that the current high inflation data is transitory and that central banks should focus more on the lower growth outlook and 2022 headwinds. For this reason, we continue to look to extend into longer dated maturities where rate hikes are being priced into issuance throughout the month.
Chart of the Month: BoE Hawkish Sentiment Brings Forward Pricing for Rate Hikes in 2022
For Europe and Asia-Pacific markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust and its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of Northern Trust and are subject to change without notice.
This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.
Forward-looking statements and assumptions are Northern Trust’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.
The Northern Trust Company of Hong Kong Limited (TNTCHK) is regulated by the Hong Kong Securities and Futures Commission. In Australia, TNTCHK is exempt from the requirement to hold an Australian Financial Services Licence under the Corporations Act. TNTCHK is authorized and regulated by the SFC under Hong Kong laws, which differ from Australian laws. In Singapore, The Northern Trust Company of Hong Kong Limited (TNTCHK), Northern Trust Global Investments Limited (NTGIL), and Northern Trust Investments, Inc. are exempt from the requirement to hold a Financial Adviser’s Licence under the Financial Advisers Act and a Capital Markets Services Licence under the Securities and Futures Act with respect to the provision of certain financial advisory services and fund management activities.
Northern Trust Asset Management is composed of Northern Trust Investments, Inc. Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K, NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Belvedere Advisors LLC and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company. © 2021 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A.
