After the minutes from last month's Fed meeting were released on Wednesday, the markets pulled back on the possibility of Tapering bond purchases this year and a potential rate hike in 2022. On top of that, worries of slowing global growth were renewed as COVID cases with the Delta variant increased and Japan declared a state of emergency for the Olympic Games. T. Rowe Price, Jr. once famously said, "Change is the investors' only certainty." As we find ourselves in constant flux, we have to be reminded of how data can be our anchor when things are a bit upside down. Here's what we're seeing so far this week...
Fed Minutes Move Markets. As the language from last month's Fed meeting was scrutinized with a fine toothed comb, it was revealed that Fed governors concluded that the point of scaling back bond purchases had not yet been reached. This would seem to be positive news for the camp of investors who seek perpetual Fed liquidity. However, it was also shown in the minutes that the odds of a 1st rate hike in 2022 were greater than before. Powell even stated in the minutes, "I am confident that we are on a path to a very strong labor market." Analysts at Morgan Stanley recently stated that they expect the Fed to provide forward guidance in September and announce tapering at the end of the 1st quarter of 2022. The struggle for the market is to come to grips with an improving economy that is less reliant on the Fed. This realization causes pull backs when Fed language gets hawkish. As we have noted before, when the Fed began Tapering bond purchases in 2013-2014, the S&P 500 Index returned north of 40% during that period. Investors need to calm down and let the Fed do what they do.
Slow Week for Economic Releases. The releases have been a little disappointing overall this week, but not not all in the negative column. Job Openings dropped, which though disappointing, could be a sign of jobs getting filled - especially after a strong Jobs Report last week. The services indices were slightly lower month-over-month, but still at elevated levels that point to economic expansion. Weekly Jobless Claims were higher than last week, but not significantly. Over the past 13 weeks, claims have dropped in 10 of those weeks. On the positive side, the Consumer Board's Employment Trends Index, which measures claims, openings, positions able to fill or not fill, showed improvement month-over-month and hit am 18-month high. Consumer Credit surprised to the upside and also hit a level not seen since 2016. This shows the consumer is alive and spending. The National Financial Conditions Index was steady last week and the St. Louis Fed's Financial Stress Index hit new lows, showing stable financial conditions. Overall, no reason to cry in your Cheerios.
COVID - the Gift that Keeps on Giving. There seems to be a desire by some to keep COVID in the news cycle in perpetuity, as the national pastime has become being in a constant state of fear. The latest fears came about by the recent decision of Japan, host of the Summer Olympics, to declare a state of emergency and not allow fans in the stands to watch the athletes compete. This stands in stark contrast to the recent spring sports here in the U.S. For some context, the Delta variant is the new subject of concerns regarding global growth. As we pointed out earlier this week, viruses depend upon "host" bodies to infect and thrive. A virus will mutate, which almost always happens, in order to survive as it cannot find new hosts to infect. Here in the U.S., the Delta variant (depending upon which agency you consult) comprises 40-50% of daily cases. Yet, deaths and hospitalizations are not increasing. Hospitalizations have declined for 10 consecutive weeks here in the U.S. Deaths in the U.S. hit the lowest point (111) on July 5th since the pandemic began and death numbers were being tracked on March 16th, 2020. In the U.S. we have had more than 34 million cases and 158 million vaccinated. Those figures plus the CDC's estimate of undocumented COVID cases, and our country is at herd immunity (70%). Contrast that with Japan, who only had a little more than 800,000 cases, has only 20 million vaccinated, and even with the best estimate of undocumented cases, Japan is at only about 20% of the population with antibodies. So it's no surprise cases are increasing in Japan, but again, deaths and hospitalizations are not increasing. Cases are up 18% in Japan from three weeks ago, but deaths are down 69% over that same period. The Delta variant is shown to have only 11% the mortality rate of the original strain of COVID. As viruses mutate and find fewer hosts to infect, each mutation weakens. As FDR once famously said, "We have nothing to fear but fear itself."
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