The support purchases are to be reduced

A few days ago, the US central bank (FED) announced it will start to reduce its support purchases in the bond markets in November - the first step in normalising its monetary policy.

For the month as a whole, the US S&P 500 Index rose by 7.0 per cent measured in USD, while the European Stoxx 600 Index increased by 4.7 per cent measured in EUR and the Nordic VINX Index climbed 2.3 per cent measured in NOK. Here in Norway, the Oslo Stock Exchange (OSEBX) rose by 2.5 per cent.

The reduction has started

As part of its extraordinarily supportive monetary policy, the FED been buying securities for USD 120bn each month. This has taken place for around 20 months and been part of the support provided to the pandemic-affected economy. At the latest interest-rate meeting, the FED announced it would reduce its bond purchases by around USD 15bn per month, which means the support purchases will stop in eight months’ time.

Interest-rate hike on the cards?

In addition to the support purchases, zero interest rates are also part of the current adapted monetary policy.  The markets expect it to take time before interest rates are increased, and are now pricing in that the first interest-rate hike in the USA will be as early as in mid-2022, while only a few months ago this was expected to take place well into 2023.  Several central banks, for example those in Canada and Australia, have begun or accelerated their interest-rate rises, and this is also the case here in Norway.

Rise in inflation

In addition to improved growth prospects, increased inflationary pressure is a key argument for normalising the monetary policy. Whether or not the inflationary impulses are temporary is a constantly recurring debate. On the one hand, bottlenecks, higher commodity prices and supply-side consequences appear to be a temporary effect, while on the other hand the increased demand resulting from a more expansive fiscal policy and higher wage growth indicate the inflationary pressure is more permanent.

The road ahead …

Despite a more normalised monetary policy, the alternative return in the fixed-income market is still low. In addition, the normalisation reflects a stronger economy, which is also reflected in higher corporate earnings. This means that shares still appear to be a good alternative.

If you can’t explain to a ten-year-old why you own a stock, you shouldn’t own it. 

Peter Lynch