The taper tantrum begins
Markets had so far shrugged off the prospect of central-bank monetary tightening. But not any more.
“The stockmarket seems to... be having its ‘taper tantrum’,” say Jacob Sonenshine and Jack Denton in Barron’s. Last week the US Federal Reserve signalled that it could be ready to start reducing (or “tapering”) the amount of emergency support it gives the US economy before the end of the year. It is currently buying $120bn-worth of US government bonds and mortgage-backed securities (MBS) with printed money every month. A reduction in central-bank stimulus is bad for stock and bond prices, but markets had so far shrugged off the prospect of monetary tightening.
Yet on Tuesday the S&P 500 fell 2%, its worst day since May, as bond yields (which move inversely to prices) rose. The benchmark US 10-year Treasury bond yield has gone above 1.5% for the first time since June. Higher bond yields prompt investors to buy bonds and ditch stocks.
Barring serious economic turmoil, the Fed is now expected to announce tapering in November, says Justin Lahart in The Wall Street Journal. It looks poised gradually to reduce the pace of monthly asset purchases until they hit zero sometime in the middle of 2022. That could open the way for interest-rate rises before the end of next year.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
On this side of the Atlantic, the Bank of England is also moving closer to raising interest rates, says Paul Dales of Capital Economics. The Bank left rates unchanged at 0.1% and the quantitative easing (QE) target at £895bn during its September meeting. Yet the minutes noted that the case for some “modest tightening in monetary policy” had “strengthened” since its last meeting. The Bank appears to be more worried that inflation will stay stuck above the 2% target (which necessitates earlier interest-rate hikes) than that the economic recovery is losing steam (which would require policy to stay looser for longer).
The Bank seems to have taken a slightly “hawkish” turn, agree Sanjay Raja and Panos Giannopoulos of Deutsche Bank. Policymakers are just waiting to see what effect the end of furlough has on the job market before acting on inflation. The analysts now expect the bank to raise rates to 0.25% in February 2022, with a further rate hike in November next year to 0.5%. This week the Bank’s governor, Andrew Bailey, indicated that the Bank might even hike rates before the current QE programme finishes at the end of this year.
The Bank of England owns more than a third of UK public debt because of quantitative easing, says Jeremy Warner in The Daily Telegraph. Easy money has saved “the Exchequer billions in debt servicing costs”. Yet growing inflationary pressure could force it to “jack up interest rates”, which will cost the Treasury billions. The health of the public finances is “a matter of growing concern”.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Alex Rankine is Moneyweek's markets editor
-
Higher rates are disappearing – should you fix your savings?
Fixed savings rates have dropped to their lowest levels in over a year. Should you fix your savings now ahead of a potential base rate cut in November?
By Katie Williams Published
-
Nine million people fall victim to financial scams, says Citizens Advice
The charity says that around one in five people across the UK have been caught out by a finance scam in the past year - here is how to protect your money
By Chris Newlands Published
-
What will a broken-up Google look like?
The US courts have ruled that Google is a monopoly, leaving it facing the prospect of a break-up. WIll that be a good thing?
By Matthew Lynn Published
-
How will the UK gambling sector be hit by the Budget?
There are concerns for the UK gambling sector in the lead-up to the Autumn Budget. What could be on the cards?
By Dr Matthew Partridge Published
-
HSBC returns to cost-cutting plan
HSBC is set to revamp its commercial banking division – but will it come at a cost?
By Dr Matthew Partridge Published
-
Pfizer shares rise as US investor takes $1 billion stake
Pfizer shares are on the up since US activist investor Starboard Value built up a stake in the drug maker. But strategic options appear limited
By Dr Matthew Partridge Published
-
Qualcomm could acquire rival Intel – but securing the deal won't be easy
A tie-up between Qualcomm and its semiconductor rival Intel would be a coup. But multiple regulatory and commercial hurdles lie ahead.
By Dr Matthew Partridge Published
-
How to invest in the quiet market months
Here's how to invest in the quiet market months, since “sell in May” hasn’t paid off this year.
By Cris Sholto Heaton Published
-
Spire Healthcare: invest in the booming demand for private healthcare
Spire Healthcare is one of the few listed companies benefiting from the growing trend in private healthcare. Should you invest?
By Rupert Hargreaves Published
-
Are insurance companies a good investment?
Costs may be soaring but the insurance sector is currently going through one of its most profitable periods. The market has been slow to realise the opportunity here
By Rupert Hargreaves Published