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.
With media attention focused on the botched Afghanistan withdrawal, President Biden’s stimulus package, and the ongoing Covid virus, the general public seems to have forgotten that the U.S. if facing yet another debt ceiling that is expected to be reached next month. The short maturity fixed income crowd has not lost sight of that fact though, as evident in T-bill yields. Nearby maturities are trading at 0.02% as buyers are willing to pay a premium to ensure that they get paid back at maturity. We expect that the ceiling will ultimately be raised, as it always is, but not before more partisan squabbling between the two parties.
The Bureau of Labor Statistics reported that the U.S. economy only added 235,000 new jobs in August. That was well below the anticipated 733,000 that was the consensus expectation. On the back of that miss, investors are asking if that number is weak enough to convince the FOMC to postpone the tapering of open market purchases.
There’s no doubt that the $120 billion monthly purchases are distorting interest rates and other asset prices. With rates across the yield curve very nearly at zero, the Fed can declare “mission accomplished.” But part of that accomplishment is an arguably wildly overvalued stock market. The question we suspect the Fed members are asking themselves is, “will tapering undermine record high stock indices?” It might, but that’s not part of the Fed’s dual mandate to keep unemployment low and inflation stable. The unemployment rate has fallen to 5.2% in August from 14.8% in April 2020, while the annual CPI is 5.3%, well above the Fed’s 2% target.
Unexpectedly, in the days following the Labor Day shortened workweek, corporate issuance exploded. For the four session period, 52 borrowers came to market and sold in excess of $76 billion of corporate debt. Despite the surfeit, the supply barely moved interest rates, as the 10-year Treasury note was less than 4 basis points higher for the week.
We still consider the chance of the Fed tapering purchases this monthly as about even. The August Producer Price Index likely shook the FOMC’s confidence that inflation is transitory. PPI Final demand increased 8.3% over last year’s index value. Compounding the Fed’s likely discomfort are the calls from influential voices advising President Biden not to renominate the Chairman. This week Columbia Professor and Nobel Prize Economist Joseph Stiglitz made such a suggestion in an interview with Reuters. In the interview he suggested Cleveland Fed President Lael Brainard be given the nomination. While Brainard and Powell are about on par in terms of monetary dovishness, Brainard favors greater bank regulation and has the vocal support of populist Congresswomen Elizabeth Warren and Alexandria Ocasio-Cortez. A miscommunicated tapering message has the potential to cause material selling in stocks, which may be enough to prompt Biden to replace Powell.
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