Fed Ambiguity Bullish?
Fed presidents signal time to end Tapering, but Powell leaves room for flexibility
Economic data mixed last week, but consumers acting responsibly
Delta variant could be hitting a plateau in the U.S.
Multiple Fed presidents last week voiced their concerns about extending bond purchases much longer. Atlanta Fed President Bostic stated that Tapering should begin soon and end fast. Fed Presidents of the St. Louis, Kansas City, and Dallas branches also voiced the need to being Tapering soon. The market took this news poorly, selling off more than 1% on Thursday. However, Fed Chairman Powell had his turn at the mic on Friday and seemed to calm markets by giving the Fed some flexibility on when to actually begin Tapering. Should the Delta variant cause more economic slowdown, the Fed could hold off on Tapering. The market took this news as bullish, despite the fact that multiple Fed presidents doubted that the Delta variant would hamper growth enough to warrant further stimulus. The Jobs report this week will be closely watched as the Labor Market has become a key metric in determining when Tapering is likely to begin.
Economic data was mixed last week. Manufacturing data disappointed from July. Housing data surprised to the upside. Consumer data was slightly mixed. The University of Michigan Consumer Sentiment Index declined significantly from 81.2 in July to 70.3 in August. Personal Income improved month-over-month, rising from 0.1% in June to 1.1% in July. Consumer Spending was relatively flat. It would seem that consumers are currently acting very responsibly. While incomes are higher, the savings rate is also still elevated (9.6% vs. 6.7% historical average). Consumers at this point do not seem to be taking on considerable debt, which pokes holes in a bubble theory.
It will be a busy week for economic releases and much for investors to digest. So far, the National Financial Conditions Index continues to point to stable economic conditions. The Delta variant is appearing to plateau in the U.S. as positive test rates have stabilized. The positivity rate fell to 10.6%, which is the first time it has been below 11% since August 5th. Positivity rates followed the same pattern in early December of last year, only to make new highs in January. If the positivity rate can break below 10% and proceed lower, it could signal the end of this most recent Delta wave. This would certainly open the door for the Fed to being Tapering and provide a signal that the U.S. economy is strong enough to stand on its own two feet.