At first glance the September unemployment report released on Friday looked wildly disappointing. It’s been described as “Disastrous” at several media outlets. Consensus was looking for 500,000 newly created jobs for the month, and to be honest, we would have taken the over on that bet. Instead the BLS reported that the economy generated 194,000 jobs for the period.
At the September FOMC meeting Chairman Powell and the Open Market Committee failed to signal a concrete start to tapering open market purchases, but they did inch closer. Powel described current economic condition as having mostly met the committee’s standard to begin to taper and suggested that an announcement would be made at the November meeting. It was also announced that the Reverse Repo (RRP) operation designed to sop up excess front end liquidity will be doubled from $80 billion per counterparty to $160 billion. That totals over $12 trillion dollars if every counterparty maxed out the operation! The size of outstanding RRP ballooned at quarter end, totaling over $1.6 trillion, a record for the program.
Fundamentals took a back seat to political in-fighting this week as the Republicans made it clear that they were going to do precious little to assist the Democrat’s goal of lifting the debt ceiling, keeping the government open for business, or passing Biden’s $3.5 trillion social stimulus. Interest rates moved higher across the curve as the uncertainty of fiscal policy spooked bond investors. The new 2-year note auction that was held on Monday was described by one pundit as “gruesome”, given the below average bid-to-cover ratio, and the yield at which it cleared, which was nearly a basis point above the yield asked at auction time. Following the auction, the yield-to-maturity of the 2-year note rose to 0.31%, before drifting back down to 0.266% to close out the week. That’s nearly double where the note traded last summer! Stocks fared worse, with the S&P 500 trading down about 2.5% for the week.
August proved to be the quietest month of an unusually quiet summer. The 10-year Treasury Note had a 13 basis point range for the period. The supposed highlight of the month was to be Chairman Powell’s comments to the virtual Jackson Hole Central Bank meeting on the last Friday of the month. Despite a cadre of Central Bankers calling for an immediate halt to the open market purchases, the Chairman fell short of that mandate, saying the Open Market Committee is likely to commence tapering before the end of 2021.
The last several weeks have been typical low-volume, low volatility summer trading in both the equity and bond markets. The 10-year note yield drifted steadily lower during July, falling 24 basis points to end the month at 1.22%. Economic data confirmed that the economy continues to expand at an above trend pace and the “transitory” price hikes continue to bedevil consumers. The most anticipated event of the month was the post-FOMC press conference. Unfortunately, Chairman Powell effectively repeated his comments from the previous press conference with scant details on reversing their easy money policy. One point of clarification, however, is that he doesn’t want to begin tapering open market purchases until the unemployment rate falls closer to where it was before the COVID outbreak.