Fed Bond Purchases Ineffective?
Fed hints bond tapering to begin soon at Jackson Hole Economic Symposium
Economic data mixed this week as Supreme Court nixes Eviction Moratorium
Delta variant in U.S. looks like it could be peaking, as Fed signals variant will not likely hamper future growth prospects
It's been an odd week in the markets. Overall, trading volume has been down slightly this week. Fed speakers at the Jackson Hole symposium sponsored by the Fed have gained some interest and that caused markets to move on Thursday. We can expect today's comments by Chairman Powell at the symposium to be of keen interest. The markets seem to be largely shaking off the geo-political events in Afghanistan. Here's what we're seeing so far this week.
Jackson Hole Symposium. Before Thursday's start of the Fed's annual Jackson Hole Economic Symposium, the markets had traded without much fanfare during the week. Thursday, Fed Presidents Bullard (St. Louis), George (Kansas City), and Kaplan (Dallas) each suggested it was time to begin tapering the Fed's $120 billion monthly bond purchases. Their comments even went so far as to state that current bond purchases by the Fed were largely "ineffective" at this point. In an interview published this morning, Atlanta Fed President Bostic is quoted as saying that tapering should begin soon and end fast. It's clear that we're inching closer to a tapering announcement, which will put Fed Chairman Powell's comments at the symposium in the spotlight today. It's fair to say that we can expect volatility to pick up when tapering is announced, and that's why we saw the market pull back as soon as yesterday's comments around tapering emerged. The yield on the 10-year Treasury has moved higher this week in anticipation of the symposium. We think it's reasonable to expect an announcement on tapering at the conclusion of the next Fed meeting on September 22nd. Clearly, the Fed is trying to forecast tapering as much as possible to minimize the effect on the markets. It's reasonable to expect short-term volatility around tapering as the S&P 500 Index declined 5% in 2013, only to reverse and head higher after the market adjusted to life after tapering.
Economic Data Mixed So Far This Week. The manufacturing data did not return positive results this week. Both the Richmond and Kansas City Fed manufacturing indices were lower month-over-month and the Markit Manufacturing Index was lower. Weekly Jobless Claims inched higher after 3 consecutive weeks of declines. Housing data was improved after a recent slump. Both Existing Home Sales and New Home Sales were higher month-over-month. 2nd Quarter GDP was revised slightly higher from 6.5% to 6.6%. The Chicago Fed National Activity Index turned positive after dipping into negative territory in June. Data on the Consumer is... This morning, the release of Personal Income showed a 1.1% increase July versus +0.2% expected. Consumer Spending, on the other hand, rose just slightly by 0.3%, as expected. The University of Michigan's Consumer Sentiment Index comes out later today with an expected reading of 70.7, which if accurate, would be lower than July's reading of 81.2. An important case was decided by the Supreme Court on Thursday which effectively ended the moratorium on evictions. The argument was brought by the a consortium of landlords that the CDC had exceeded its authority in extending the moratorium. The Court stated that the CDC had exceeded its authority by narrowing the moratorium to counties experiencing higher levels of community transmission. It will be critical to see how this affects renters across the country or if there is any affect at all. It could be argued, with the savings rate still elevated at 9.6%, those who have been taking advantage of the moratorium could have enough savings to satisfy overdue rents.
Delta Variant Close To Peaking? It would seem that the number of positive cases of COVID with the Delta variant have established a plateau recently. Data from Johns Hopkins University & Medicine shows that since reaching a positivity rate of 11.1% on August 5th, positive cases have remained stable. We saw this once before in December of last year where positive cases established a plateau for about 20 days, dipped, then set their last highs in January of this year at 13.6%. The number of tests at that time were more than 2 million per day. Just recently, on August 23rd, daily tests reached a new high of almost 2.5 million. With a lower positive rate of 11.3% versus the previous testing high in January, this is good news. We will see if this plateau will turn into a move higher or lower from current levels. Meanwhile, Fed speakers at the symposium this week voiced their view that the Delta variant would not hamper growth enough at this point to warrant further stimulus. Apparently, Congress does not share that point of view as another $3.5 trillion spending package is being debated.