The Market Today

Fed Taper Appears on Track


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Initial and Continuing Jobless Claims Show Improvement: Initial jobless claims for the week ending October 9 fell more than expected, down 36k to 293k, the lowest level since the onset of the pandemic.  This marked the largest weekly decline in 16 weeks.  Likewise, continuing jobless claims for the week ending October 2 also fell more than expected, down 134k to 2.59mm.  People are surely moving off the unemployment assistance programs.  Now attention will turn to if they are moving back into the labor force.

Producer Prices Rise Less Than Expected, Partly Result of Drop in Airfares: An inflation indicator finally proved more mild than expected in the September producer price report.  Headline PPI rose 0.5% MoM bringing its YoY rate up from 8.3% to 8.6%.  Excluding food and energy, prices rose just 0.2% MoM.  When also excluding trade items, core prices rose just 0.1% MoM bringing the YoY rate down from 6.3% to 5.9%, the first decline in the YoY rate in 16 months.  Most categories of goods and services showed fractionally moderated readings from their recent run rates; but, like in the CPI report, a dramatic decline in airfares skewed the headline results even lower.  Private airfares fell 16.6% MoM, the largest decline in records going back to 2009.  This only partially unwound a 22.8% gain over the prior three months but should help moderate the September’s PCE inflation results as well.

Fedspeak: Today will bring another barrage of Fed speakers including St. Louis’s Bullard (7:35 a.m. CT), Atlanta’s Bostic (8:45 a.m.), Richmond’s Barkin (12:00 noon), San Francisco’s Daly (12:00 noon), and Philadelphia’s Harker (5:00 p.m.).


YESTERDAY’S ECONOMIC NEWS

The Fed’s Take on Tapering from the September Meeting: The Minutes from the Fed’s September meeting confirmed that officials are warming up to announcing their tapering plans soon. Most officials agreed the “substantial further progress” test for inflation had been achieved and the consensus assessment was that the employment test could be met soon. A number of officials argued the employment test had already been satisfied based on cumulative progress during the recovery. Most officials supported a plan developed by Fed staff that “was designed to be simple to communicate and entailed a gradual reduction in the pace of net asset purchases that, if begun later this year, would lead the Federal Reserve to end purchases around the middle of next year.” The plan would reduce purchases proportionally, Treasury purchases by $10 billion each month and purchases of mortgage-backed securities by $5 billion. If the plan is announced at the November meeting, “the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid-December.” Officials said any plan could be adjusted “if economic developments were to differ substantially from what they expected.”

The Fed’s Take on the Outlook from the September Meeting: Considering the subsequent receipt of another weak payroll report and Wednesday’s firm CPI report, discussion of the outlook in the September Minutes should take a backseat to the abundant commentary from Fed voters scheduled on this week’s calendar. However, at the time, officials “generally saw the risks to the outlook for economic activity as broadly balanced” while most saw “inflation risks as weighted to the upside because of concerns that supply disruptions and labor shortages” might persist for longer than anticipated. Related to supply disruptions, “Participants noted that their District contacts generally did not expect these bottlenecks to be fully resolved until sometime next year or even later.” Discussing labor shortages, “Some participants noted that the increase in labor force participation that they had expected” as schools reopened and unemployment benefits expired “had not yet materialized,” potentially because of concerns related to Delta’s spread. The resultant worker shortages “were causing firms to reduce hours and scale back production while also leading employers to provide incentives to attract and retain workers.” There was lengthy and divided discussion about how current inflation levels could impact longer-term inflation expectations, a key consideration for policy moving forward.


TRADING ACTIVITY

Stocks Fluctuated and Treasury Yields Flattened on Bank Earnings, Firm Inflation, and Fed Minutes: Stocks fluctuated Wednesday morning after JPMorgan reported revenue and earnings that topped expectations and despite an update from the BLS showing some underlying firmness in CPI inflation in September. The S&P 500 had recovered into positive territory by the lunch hour and hit its daily peak as the Fed’s Minutes from the September meeting were released (more above). By the close, the S&P 500 had notched a 0.3% daily gain, supported by improvements in every underlying sector expect energy and financials. U.S. crude prices dipped from 7-year highs and, despite the solid headline financial results, JPMorgan’s shares ended the day 2.4% lower. The Dow closed unchanged while tech strength lifted the Nasdaq by 0.7%. A modest flattening of the Treasury curve from overnight trading accelerated after the inflation data and again after a strong auction of 30-year bonds. Following the firm CPI report, the 2-year Treasury yield rose for a seventh consecutive session, adding 2.0 bps to 0.36%, a new high since March 2020. The 5-year yield closed little changed while longer yields tumbled. The 10-year yield slid 4.0 bps to 1.54% while the 30-year bond yield sank 6.7 bps to 2.03%. The 30-year auction stopped through by 1.3 bps and dealers’ share of the award shrunk amid increased interest from non-compulsory direct and indirect bidders. The spread between the 2-year and 10-year notes shrank to 117.7 bps, a three-week low.

Global equities were generally positive Thursday as corporate earnings continued and sovereign yields slipped despite another stronger-than-expected inflation signal from a major global economy. Asian indexes outside of China mostly rose overnight. The modest declines posted in China followed a stronger-than-expected producer price inflation report. Producer price inflation accelerated from 9.5% YoY in August to 10.7% in September, outstripping expectations for a 10.5% increase. September’s gain was the strongest since 1995. Consumer prices in China rose 0.7%, less than the 0.8% gain expected. Europe’s Stoxx 600 climbed nearly 1% and U.S. equity futures registered similar gains heading into a daily deluge of bank earnings. Better-than-expected results boosted Bank of America’s shares 2.8%, helped Morgan Stanley gain 1.5%, and lifted Wells Fargo stock by 1.2%. Prior to this morning’s U.S. producer price inflation report, the Treasury curve was less than 0.5 bps higher inside of the 30-year bond. Reflecting a bit of relief from a softer-than-expected inflation update, Treasury yields dipped after the PPI data were released with the biggest moves occurring in maturities of five years or less.


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