July 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.
On the Friday following the FOMC meeting, St. Louis Fed President James Bullard surprised investors in saying that he would like to see the Fed begin tapering open market purchases this fall and end the operation by the end of Q1 2022.That’s the most hawkish comment that we’ve heard from the Fed in ages! As a Fed President, Bullard rotates into FOMC voting and presently is not a voter. He will become a voter at the January 26th meeting early next year and we wonder if he’ll use that vote against the status quo. To be sure, we’d categorize him as a “flip-flopper,” alternating between hawkish and dovish positons, so his view could revert back in the coming six months. But with that statement, he is clearly going against what Chairman Powell said just two days prior.
Following Bullard’s recommendation of an early and quick taper, Fed Governor Chris Waller echoed that sentiment saying that if the next two jobs reports were strong he’d favor commencing taper at the September FOMC. Since then, many Fed officials have also come out in favor of announcing a taper at the September FOMC meeting. The one notable exception has been Chairman Powell, but we speculate that with his reappointment hanging in the balance, he’s going to be reluctant to strike a hawkish posture.
Certainly, recent economic data support immediate action, with the July employment report showing a shocking upside surprise. For the month, the economy gained 943,000 new jobs, the unemployment rate fell from 5.75 to 5.4%, and average hourly earnings rose 4.0% year-over-year. In fact, every subcomponent of the report showed strength.
The JOLTS jobs opening report released the next business day following the jobs report was equally shocking. The report showed that there are in excess of 10 million unfilled jobs that are currently available. To put that into perspective there are currently 8.7 million individuals unemployed. Prior to the pandemic, a period that was considered full employment, the JOLTS high was 7.5 million.
We suspect that the elevated level of inflation is also contributing to the Fed’s sudden reversal on tapering. The July year-over-year Consumer Price Index rose 5.4%, well above the Fed’s 2% target. In fact, that measure has been above the target since March. Chairman’s Powell’s characterization of elevated inflation as being transitory is starting to lack substance, especially considering that supply channels seem to continue to be clogged and inventory remains in tight supply.
With data pointing to a robust economy and the Fed on the verge of tapering their open market purchases, one would think that interest rates would be much higher. But with rising COVID infections, especially in areas of the country that have been reluctant to vaccinate, investors fear a repeat of last year with an extension of work from home and mask mandates.
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