September 2021

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 are starting to become a reality for the bond market as interest rates drift higher across the yield curve.  The 2-year note auction late last month 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.  The auction cleared at 0.31% and has drifted higher since, trading 0.36% at the time of this writing.  That’s more than double where the note traded at the beginning of last summer!

It’s no secret that inflation has become a national concern and even the Federal Reserve is backing away, somewhat, from describing the price action as transitory.  But the most amusing evidence of the upward creep of prices is the retailer Dollar Tree’s announcement last month that they will no longer be able to offer every item in the store for one dollar or less.  One analyst pointed out that the company making such a momentous announcement mid-quarter must mean that rising costs were rapidly eroding their profitability.  That seems likely, but we’re willing to bet that should their cost structure come back down, their new pricing strategy will not.

The September employment report, released last week, looked wildly disappointing at first glance. Some media outlets went so far as to describe it as “Disastrous.” The consensus was looking for 500,000 newly created jobs for the month.  Instead, the BLS reported 194,000 jobs for the period.  Despite that large forecasting miss, we found several truly bright spots in the report.  First, the previous two reports were revised higher for a total of 169,000 workers.  Second, the Household measure of new jobs created totaled 526,000.  The household and the establishment survey quite often tell a different story and that’s clearly the case this month.  Effectively, the establishment survey is better at smoothing the month-to-month variation, the desirability of which is an argument that is beyond this scope of this update.  Nonetheless, in our opinion the magnitude of the difference is material and we give greater credence to the 526,000 reported by the household survey.  Third, the unemployment rate shrunk from 5.2% to 4.8%, and average hourly earnings rose 0.6% month-over-month, both decidedly positive.  That all brings us to the question of “is it enough for Powell to justify tapering in November?”  We think that’s absolutely a yes, and Fed Vice Chairman Richard Clarida’s recent comments seem to verify that view.

Finally, of note, Congress voted in favor of raising the debt for a term of two months.  Since the agreement, the panic that had gripped the capital markets seems to have eased, which seems somewhat shortsighted.  After all, we’re now less than two months from another debt limit battle and all of the “hand-wringing” and partisan fighting that goes with it.


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