Is good data now bad news?
The June 16 Fed meeting and its accompanying Summary of Economic Projections were the focus of last weeks news, featuring a plot pointing to a possible rate hike by the end of 2023 and comments on the discussion about the tone of the next to QE. The market interpreted the Feds message as a sudden burst towards resolving its extraordinary policy stance in response to a strong economy and rising inflation. Investors reversed the reflection trend in the markets this year:  shares posted their worst week since February,  stocks with value stocks growing below performance,  international stocks outperform US stocks,  the dollar strengthened with its best week since september 2020  gold had its worst week since March 2020. Weak economic data in 2020 meant lighter monetary policy by the Federal Reserve and acted as a good help for stocks as investors began to appreciate in a turnaround. But, now, strong data may suggest that tighter policy is expected and weighs on stocks as investors begin to expect an eventual decline. We believe that the US economy can withstand stricter monetary policy and continue to produce solid growth once it has reached the exit speed and may no longer need stimulus from the Feds extraordinary stimulus. But in the short term, it is possible that good data could be interpreted as bad news for the US stock market, if strong economic data specifically for jobs pushes the Fed to released faster and faster. Where good is still good  Otherwise, the good news may remain good news for international actions. The first increase in inflation in the US has not been reflected globally. This means that, unlike the Fed, the European Central Bank (ECB) and the Bank of Japan (BOJ) are not under pressure to communicate a stricter policy. The inflation rate has changed:  In the United States, core consumer price inflation (CPI) accelerated to an average above + 3.8% in May from a year earlier. The euro area core CPI returned to its five-year average of only + 1.0%. In Japan, the core CPI has fallen below average and negatively at -0.3%. The rise in inflation has not been global  Source: Charles Schwab, Bloomberg data since 6/18/2021. Over the past five years, the core CPI rate in these regions has changed, with the US averaging 2%, Europe 1% and Japan 0%. But the divergence in direction has only occurred in recent months. The reason for the divergence may be related to the recovery time. The US was a leader in the spread of vaccination, which helped liberate consumer demand as the economy reopened this spring. Europe and Japan stuck to vaccinations with wide openings scheduled months later as summer begins. Also, US ports have been more congested than those in Europe or Asia, the shortage of major products also resulted in rising US prices in the second quarter. And, light inflation comparisons with a year ago, seen in March and April in the United States raising inflation will not be seen in Europe and Japan until the fourth quarter. As the third quarter unfolds, closed demand could quickly boost consumer prices in Europe and Japan. Year-on-year growth comparisons can be facilitated in the US along with supply chain bottlenecks and commodity prices. Perhaps these conditions will lead to some degree of global convergence in the core inflation rate, although a significant gap in inflation rates, as seen before 2020, may remain, with higher inflation in the United States. The US central bank policy rate is zero (between 0.0% and 0.25%). It is negative in Japan with -0.10% and in the Eurozone with -0.50%. The impact of the policy rate on the economy is determined by the environment of the inflation rate; a policy rate below the core inflation rate promotes lending and growth while a policy rate above the core inflation rate hinders lending and the economy. When adjusting nominal inflation rates using the core CPI, real policy rates that reflect current costs are estimated at about -3.7% in the US, -1.5% in the Eurozone, and + 0.2% in Japan. This suggests that policy rates in the US are much more stimulating than those elsewhere in developed economies. Current real policy norms (simple bar chart)  Source: Charles Schwab, Bloomberg data since 6/19/2021. Real interest rates calculated using the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate. With inflation moving at or below average and relatively less policy stimulus, the European Central Bank (ECB) and the Bank of Japan (BOJ) are not under pressure to communicate a stricter policy. This means that good economic data is likely to still be good news for these stock markets. Stable hand  Although overshadowed by the Fed meeting a week later, the ECB met on June 10 and said so much. The ECBs policy statement confirmed that net purchases under its QE pandemic program during the third quarter will continue to be conducted at a significantly higher rate than during the first months of the year. The ECB also improved their growth and inflation outlook. The head of the ECB, Christine Lagarde, repeatedly referred to a steady hand, at the press conference, implying that the ECB will be patient in the face of an improved perspective. She also stressed the difference between economic conditions in the Eurozone and the US, reiterating that the risk of inflation is much lower in the Eurozone than in the United States and that the ECB is still far from its inflation target. Her statement supports the view that continued stimulation is possible, despite rising growth and possible rising inflation. Following the Fed meeting, the BOJ held its meeting on June 18 and stated that it would continue all monetary policy incentives, including yield curve control, asset acquisition programs, and forward guidance. Their Special COVID-19 Response Funding Support Program, which includes the purchase of corporate securities and bonds, which was expected to expire at the end of September, was also extended for an additional six months. This commitment to continued stimulus came along with the BOJ statement that the Japanese economy has been chosen as a trend. Policies have begun to differ between those of the Fed and other major central banks. The ECB and the BOJ are securing the market through continued stimulus, while the Fed appears to be preparing the market for a forthcoming announcement of a reduction in bond purchases starting later in 2021 and ending sometime in 2022, followed by rising rates in 2023.  aperture  This divergence suggests three intakes. First, at least in the short term, it is possible that good data can be interpreted as bad news for the US stock market (especially for jobs), however good data may remain good news. good in international markets. Second, strong growth may favor international stocks over U.S. stocks, mitigating slightly from the short-term risk of a stronger dollar. And, third, investor concerns about a global economic downturn can be kept under control as, unlike the onset of the pandemic when all central banks rushed to release policy, the austerity will be a much more gradual process and some like the ECB and BOJ may not join at any time soon. Michelle Gibley, CFA, Director of International Research and Heather OLeary, Senior Global Investment Research Analyst, contributed to this report.