- Fed Watch
Federal Reserve Chairman Jay Powell answered a letter from Senator Rick Scott (R-FL) outlining concerns about a potentially significant rise in inflation. His response gave some more contours to the Fed’s intentions around it’s mysterious Adjustable Inflation Target (AIT) framework. The Fed chairman usually avoids tying himself into any obligatory statements and tends to shy...
- Fed Watch
Powell Opines On Asset Purchases, Waller Says Economy ‘Ready To Rip’
Federal Reserve Chairman Jay Powell gave markets an important morsel this week when he opined on the timing of when the Fed would taper asset purchases in relation to when it would raise rates. He clarified that the world’s most important central bank will slow the pace of its bond purchase “well-before” it decided to raise rates. He spoke at the Economic Club of Washington DC. The comments came only a day after the Labor Department came out with its inflation numbers. The CPI saw the biggest one-month jump since 2012. Worry not say most Fed officials. This inflation will be transitory and remember, the secular deflationary forces we have been facing for the last decade seem unlikely to ‘turn on a dime’. The Fed released the Beige Book which is an informative economic survey across the different regions covered by the respective Regional Banks. Businesses reported one of the main sources of costs was supply-chain disruptions. Obtaining shipments from overseas in a timely and cost-effective manner is becoming problematic. The report found the economic activity accelerated at a moderate pace in line with successful vaccination efforts and higher than expected government stimulus hit consumer wallets. Those who analyze Fed words very closely noted that in the Beige Book release this week they used the word ‘shortage’ or ‘shortages’ a record high of 37 times. The last record was in March and mentioned the term six less times than the recent release. The Dallas, Philadelphia and San Francisco banks all noted that the week-long traffic jam at the Suez Canal likely contributed in the short-term. Semi-conductor shortages were mentioned specifically a high number of times. Despite this, many positives were seen across districts including robust manufacturing growth. Christopher Waller gave one of his first publicized interviews since ascending from Jeremy Bullard’s head of Research at the St. Louis Federal Reserve. As we predicted upon his nomination, he is in the ultra-dovish camp and in fact was apparently integral in the research efforts behind the eventual adoption of the Adjusted Inflation Target framework. If someone is looking for a Fed member to blink, don’t look at him. Mr. Waller got interviewed by CNBC’s Steve Liesman. He said the economy is “ready to rip.” He mentioned he expected the highest growth rates in decades, inflation rates at 2 and a half percent and for employment to steadily get better. You might expect him to then talk about restraint or tightening of Fed policy, however, he didn’t take this tone at all. He said the Fed was going to let the economy go and not spoil the fun, in line with the goals of AIT. He also flat out rejected the SEP, or the dot plot, in the interview with Liesman. Powell has also cast doubt on the dot plot in some recent comments. This fixture of Fed watching has been a pretty important tool over the years to evaluate future Fed actions. Powell also opined on cryptocurrency and said the following, “What people call cryptocurrencies, they’re really vehicles for speculation. No one is using them for payments, for example, like the dollar.” He further elaborated, that in his opinion, he viewed cryptocurrency as more similar to a commodity, like gold. Powell has said a ‘digital dollar’ is a very high priority for the leadership of the Federal Reserve. Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 1.66%.
- Fed Watch
Powell Sees Recovery Ahead of Schedule, Bank Dividends to be Restored In June
When Fed Minutes are released and the market doesn’t react that’s generally a good thing. Despite the mini-tantrums of the first quarter over rates, the news from the Fed this week appeared to help rates settle down, which may have helped the mega-cap technology names regain some of their wings. The Federal Reserve released the meeting minutes from their recent mid-March meeting on April 7th. The Fed changed its tune very little, despite recent expression of some optimism in other forums. For instance, it continued to stress that it will both keep interest rates near zero and continue the current rate of asset purchases until “substantial further progress” has been made toward the targeted levels for employment and inflation. Importantly, the Fed will also view temporary price increases associated with the unprecedented and widescale opening of the economy as temporary. We may have forgotten with everything else going on that the Fed is still providing unprecedented policy support. They are saying they will not try to slow down the economic boom that is coming until maximum employment and inflation targets have been reached. It becomes clearer and clearer with each official Fed communication that a key feature of the new Adjustable Inflation Target (AIT) framework is the willingness to be behind inflation rather than ahead of it. This is a significant departure from past Fed behavior and it essentially means that the neighbors are all on board, and loud music and many punch bowls will be permitted, from a monetary perspective, until the wee hours of the morning. This is indeed unprecedented and surely is bullish, at least in the short and medium term. According to the minutes, the size of The American Rescue Plan was larger than expected. In their January projection they had thought a smaller package more likely. This has resulted in a more positive economic outlook. In fact, the Fed is projecting the strongest growth in nearly half a century. Nonetheless, the independent agency is communicating cautiously and steadily to ensure the substantial progress made since last March is not forfeit. Federal Reserve Chairman Jay Powell spoke on Thursday during meetings at the International Monetary Fund and the World Bank. Although the Chairman mentioned the brighter outlook on the horizon for the US economy he cautioned listeners that the post-COVID-19 economy would be different and that he would be focused on ensuring the millions of people who lost their job as a result of the pandemic will be able to find work. He said he thinks that the America is “on track to allow a full reopening of the economy fairly soon.” The New York Fed is looking at broadening the number of firms it does business with to implement monetary policy. Lorie Logan, who manages, the Open Market Account holdings of securities and cash (worth $7.7 trillion) said on Thursday that the bank is looking into doing business with a broader range of firms than it has traditionally. Her focus is on the overnight repo rate which sets the low-end in transactions with qualifying firms. By expanding the amount of counterparties able to participate, Ms. Logan hopes a “more vibrant and effective marketplace’ could strengthen the effectiveness of monetary policy. Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 1.66%.
- Fed Watch
Chairman Powell Testifies, Fed Payments System Goes Down
Federal Reserve Chairman Jay Powell testified on consecutive days before the Senate Banking Committee and the House Financial Services Committee, respectively. Chairman Powell, as he so often does, stuck closely to the script and tried to bob and weave his way around loaded questions and partisan punji pits. Powell has gotten accustomed to the dance and maybe even good at it. In an undercurrent you might not have necessarily noticed if you don’t watch Congressional hearings intently, Republicans kept giving Powell ‘attaboys while they were conspicuously absent from the other side of the aisle. Progressives are already calling for a candidate more in their ideological lane when Powell’s term expires in about eleven months. Powell was asked whether he thought asset bubbles were forming. He said it was a ‘a very mixed picture’ and that some areas of the market exhibited potentially excessive valuation levels, while other important areas for financial stability like leverage and funding risk remained quite healthy. As a demonstration of the dynamics referenced in his remarks, even though there was chaos in bond markets this week as yields rose rapidly, the Stable Overnight Funding Rate (SOFR), the interest rate benchmark that has finally replaced the tarnished LIBOR, hit new lows of .1% this week in stark contrast to the other end of the curve. When the Fed is on the spot as much as is it is this week it is quite natural for the Governors to take a concerted messaging effort in order to maximize their assuaging effects. Governor Lael Brainerd gave a web-casted lecture at Harvard entitled How Should We Think about Full Employment in the Federal Reserve’s Dual Mandate? She gives an extensive explanation of how changing economic relationships over the past decade have led inflation to trend significantly below target and to become insensitive to resource utilization. She, like Powell, thinks the Fed could be as much as 3 years away from target. As James H. Stock recently pointed out in his Foreign Affairs article, The Rate Debate, during the 1990s recession for each percentage point increase in unemployment inflation fell by 0.8%, in the 2000 recession that figure was 0.4%, during the Global Financial Crisis it was 0.3% and in the most recent recession it was 0.1%. So, as you can see the Fed is quite confident in the data underpinning its new framework and this is why Powell can so confidently proclaim before Congress that inflationary forces are unlikely ‘turn on a dime.’ A chorus of other officials including even the relatively hawkish Mr. Bostic echoed Powell’s sentiments that they were not concerned about the rate-rises and, in fact, view them as evidence of a strong recovery on the horizon. In perhaps one of the best real-time displays as to why a ‘digital dollar’ might have utility, the antiquated but incredibly essential payments infrastructure maintained by the Fed went down for a few hours. The ACH and several other crucial interbank functions were affected. Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 1.407% up from 1.34% last week. On Thursday, it briefly went above 1.6%.
- Your Weekly Roadmap
Stocks Rocked By Trump Tweets; Down Over 2% Friday
“The market is hereby ordered to go up and STAY UP!” Did you miss that tweet by President Donald Trump on Friday after his—and the market’s—frustrations with the Federal Reserve Board’s inability to heed his demands and also with China’s hard-to-understand policy of retaliating on his trade tariffs? OK, I’m being facetious. Trump didn’t order the market to rise (I’m thinking he wishes he could), but he did say this in a tweet: “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA….” Firstly, short of war Trump cannot unilaterally order companies to do that without Congressional approval, so stand down. Yet market action Friday suggests investors are likely finding his tweet tantrums tedious at this point, despite the good work he’s done loosening overbearing business retarding regulations and cutting corporate taxes. (The latter was of course marred by the fact that he didn’t recover the lost taxes elsewhere and the federal budget is busting.) There stocks were cruising along nicely during the week, with the market up over 1% by Thursday and seemingly set to break the string of three down weeks. Then came the whirlwind named Trump. Investors weren’t thrilled by a Friday speech given by Fed chair Powell, who effectively said “we’ll wait and see” about future rate cuts. (For more go to page 6.) Yet the market reaction to his mild chat was muted compared to the volatility that ensued after China announced new retaliatory tariffs and after President Trump went ballistic in his threatening tweets against both Powell and China. I think the markets, with good reason, found his tweet storm a bit unnerving. The Standard & Poor’s 500 index was down over 2% Friday and fell 1.2% on the week. Though up double-digits percent this year, it is now little changed from levels first reached in January 2018. I will note that trading volumes for the week were of the traditionally low late August sort, so I don’t see a lot of conviction here, which is a plus. Government bonds rallied after China’s finance ministry on Friday said it would impose tariffs on $75 billion of U.S. goods, in two stages. The first batch would kick in Sept. 1, with the second coming Dec. 15. Let’s talk about the yield inversion of the 10-year-two-year U.S. Treasury note spread. I’ve noted before that it isn’t a particularly reliable signal. And my colleague Tom Lee produces a good refutation of the inversion signal, beginning on page 3. But here’s a recent take on this from our friends at Cumberland Advisors: “Most pundits are using the inversion of the yield curve as a forecast of a slowdown. But as we have noted in other pieces, economic slowdowns are far from synchronous with inversions. Growth continued for a year and a half after the yield curve inverted in 2006. Looking at recent economic data, it’s pretty hard to find the slowdown: – Retail sales advanced 0.7% month-over-month in July, versus an expectation of 0.3%. – The Empire Manufacturing Index (New York survey of business conditions) advanced 4.8% versus an expectation of 2.0%. – Core CPI is 2.2 % over the trailing 12-month level – right where it was at the end of December when the 10-year bond yield stood at 2.685% and the 30-year bond yield was 3.01%. – The S&P 500 and the Dow Jones are still up double digits this year – even after this week’s turmoil. – Second-quarter non-farm productivity is at 2.3% vs. a 1.4% expectation. Cumberland goes on to say: “This does not look like an economy that is rolling over. Nor is it. This is a bond market that has been buffeted by a number of factors that are not US-related.” I don’t disagree with this trenchant analysis. Even Europe isn’t completely dead. Several eurozone purchasing managers surveys suggested the eurozone economy may have stabilized in the third quarter. The eurozone economy may have started to steady in recent weeks after the flash composite Markit purchasing managers index for the eurozone rose to 51.8 in August, from a previous reading of 51.5. Over 50 suggests expansion. The eurozone service sector PMI hit a two-month high of 53.4, up from 53.2, and the manufacturing sector PMI recovered to 47.0 from 46.3, continuing to contract but at a slower pace. With all the bad news we’ve seen, I still think this looks like market resilience. Quote of the Week: You can look for Trump tweets—too much to fit here—this week on page 11. Looking Questions? Contact Vito J. Racanelli at vito. racanelli@fsinsight. com or 212 293 7137. Or go to