Economic data this week offered something for everyone. For those seeing the uptick in inflation as transitory, the Consumer Price Index data was not as bad as feared. The month-over-month CPI fell from 0.5% in July to 0.3% in August; arguably an improving trend, but still rising at an above target pace. The year-over-year rate also improved marginally falling from 5.4% in July to 5.3% in August. Again, right direction but still alarmingly high.
With the confluence of Labor Day on Monday and Rosh Hashana on Tuesday and Wednesday, we kicked off the week expecting a quiet one. Instead, corporations issued paper at a “break-neck” pace. For the week we saw 52 borrowers sell in excess of $76 billion in paper. Surprisingly, the large supply barely moved interest rates, as the 10-year Treasury note was less than 4 basis points higher for the week. The S&P 500 traded lower each successive day this week as forecasts for slowing economic growth dominated the headlines, but point-to-point the index was down approximately 1.00%. Hardly a correction!
The Bureau of Labor Statistics reported that the U.S. economy only added 235,000 new jobs is August. That was well below the anticipated 733,000 that was the consensus expectation. The immediate question is that number weak enough to convince the FOMC to postpone the tapering of open market purchases. Given the verbal jousting of the various Fed Presidents and Governors over the last few weeks, we conclude that the answer is a solid Maybe.
Powell turned ever so mildly dovish in his comments to the virtual Jackson Hole Central Bank meeting on Friday. Despite a cadre of Central Bankers calling for an immediate halt to the open market purchases, the Chairman said the Open Market Committee is likely to commence tapering before the end of 2021. We believe the street had set up for more hawkish language, with some looking for an announcement that taper would begin in September. That was a foolish call! While the Fed doesn’t always look to the calendar in making policy announcements, the Chairman had to realize that doing so on the last Friday of August would rock the market. Instead Treasuries traded sideways which was enough to drive the S&P 500 to another record high.
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.
Market volatility continued in June as investors expressed relief that much of the Covid-mandated restrictions had been lifted while simultaneously worrying that the more serious Delta variation could possibly force the population back into quarantine. While the latter caused an occasional plunge in stock prices, the corrections have been short lived as long bond yields have steadily fallen, with the 30-year note below 2.00% at the time of this writing.
The Federal Reserve’s June meeting was viewed as a hawkish shift. A shift in rhetoric only, as the Fed will maintain its current ultra-easy monetary policy for the near future. Recall from the previous FOMC meeting on April 28th, Powell reiterated that they believe the uptick in inflation will prove transitory and they were comfortable with the status quo. When pressed on whether the committee had begun discussions on how taper would be enacted, he responded that they “haven’t even talked about talking about taper.”
The big news this month was the Fed announcement that the Central Bank intends to reduce their holdings of ETF’s and individual corporate notes. Selling secondary holdings can technically be defined as tightening, but in this case the size is tiny relative to their buying operations and can be explained away as an administrative adjustment. In individual corporate names they hold over 1,200 line items and about two dozen ETF’s, both investment grade and High Yield. We don’t expect the unwind to have any market impact at all. The bigger issue is that the Street has begun to speculate that at the June 16 FOMC meeting, the Fed will raise the rate paid on Reverse Repo and IOER by 5 basis points. In doing so, the Fed would effectively reset the T-Bill to about that same level, lifting it off of the 0.00% level at which it has been trading for months. The one issue potentially keeping the Fed from acting is their continued insistence on avoiding any form of tightening – perceived or real.
After three consecutive months of rising 10-year interest rates, the benchmark note yield drifted lower in April ending the month at 1.62%. To put that into perspective, the 10-year rate bottomed last summer at 0.50%. The move higher has been driven by the easing of COVID-related restrictions, the resultant strong rebound in economic activity, excessively easy monetary policy and the concern that the fiscal stimulus passed by Washington will result in higher inflation.
The start of the second quarter has been quiet in the fixed income market, with the yield curve unchanged and a dearth of new issuance.
The March inflation measures, which was expected to be elevated, didn’t disappoint. The Producer Price Index, released Friday morning April 9th after a computer glitch at the BLS held up the report for 25 minutes, registered 4.2% YOY. Well above last month’s 2.8% reading. Traders chose to ignore the surprise though, and the bond was little changed on the day.