Fed Ready To Shift?
The Fed minutes released last week from July's meeting point to a majority of Fed governors that believe it's near time to begin tapering of bond purchases. When the minutes were revealed at 1:00 pm CST, the equity markets immediately began to sell off, adding volatility that slowly ebbed by the end of the week. Investors, being human, tend to repeat mistakes of the past. In 2013, equities sold off for approximately one month after the Fed announced plans to begin tapering. Yield, meanwhile, rose more than 100 basis points for the next 7 months. Investors don't want to face the inevitability of a shift in Fed policy, but it's a shift that is necessary as it would appear the U.S. economy can and should stand on its own two feet.
Economic data from last week seemed to confirm what a majority of Fed governors are promoting. Weekly Jobless Claims hit a new 17-month low last week and are within shouting distance of the pre-pandemic claims numbers. Industrial Production and Capacity Utilization, which measure production and output for manufacturers, both exceeded expectations and were higher month-over-month. Leading Indicators for the economy also improved, as did Building Permits. Housing data did disappoint, but the primary disappointment was Retail Sales. The consumer metric was down 1.1% in July, which was much higher than expected. However, we would note that since the pandemic began, consumers have actually been fairly responsible and have therefore been finicky when COVID cases rise. It's hard to read too much into one month's worth of data. Corporate revenues were up substantially for the 2nd quarter, so consumers are obviously fueling company profits.
The larger question is where are we going from here? We think yields might be telling us something. In the first quarter, yields were on the rise as economic growth expectations began to rise and key buyers of Treasuries (i.e., Japan) shifted away from Treasuries. Now, we're seeing the opposite. The Japanese appear to be hedging and/or buyers of Treasuries, which has forced rates lower. This has been seen as tied to the rise in COVID cases, and it could be a mistake to bet on lower rates going forward. Morgan Stanley recently put out a report that they expect COVID cases to peak soon, and that seems to be confirmed by the CDC in a report published by Bloomberg that cases appear to be peaking in the Northeast. This week will be important to watch as cases have moved lower for two consecutive weekends. Yesterday's case count was the lowest in 40 days. The big data dump from over the weekend typically happens on Tuesday as local health departments update revised numbers from weekend tallies.
If projections are correct, and numbers start to recede soon, we can expect better consumer confidence going forward, a shift in yields higher, and an announcement by the Fed of future tapering of bond purchases. We will get a peak at consumer data this week to see if the flash reading on consumer sentiment was accurate. The next couple of weeks will be interesting.
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