The Market Today

Coalescing Around Taper Timeline


by Craig Dismuke, Dudley Carter

FOMC MINUTES

How Many Participants Believe “Substantial Further Progress” Has Been Achieved?: The Minutes from the Fed’s July meeting; which Fed Chair Powell described as the first deep dive into the timing, pace, and composition of the taper process; are scheduled for release at 1:00 p.m. CT.  There is a growing expectation that the timing of the Fed’s tapering process will begin sooner rather than later, with an announcement perhaps as early as their September 22nd meeting.  As of their June meeting Minutes, “The Committee’s standard of ‘substantial further progress’ was generally seen as not having yet been met.”  Next week’s Jackson Hole Symposium, which Fed officials have a history of using to foreshadow policy changes, will also be a key event to watch.


CORONAVIRUS UPDATE (Chartbooks: Vining Sparks Coronavirus Chartbook and Vining Sparks Coronavirus State Charts)

Delta Variant Remains the Focus: The U.S. is planning to extend a mask mandate for public transportation, including airlines, until mid-January. The White House’s COVID-19 response team will host a press briefing later this morning. Chicago is reintroducing a mask mandate for indoor public places. Morgan Stanley requested vaccinated employees provide proof of immunization. Notably, Target’s CEO said during this morning’s earnings call the U.S. consumer has so far been “optimistic” and “resilient” amid Delta’s spread, adding the company hasn’t seen a perceptible drop in activity. Globally, Japan extended states of emergency from August 31 to September 12 that will now reportedly cover roughly 60% of the country’s population. In Hong Kong, social distancing measures will now be in place through September 1 and most inbound travelers will be subject to a 14-day quarantine, up from 7 days. New Zealand will return to a full lockdown after four additional cases were found and Ontario plans to lengthen restrictions due rising cases.


ECONOMIC NEWS

FOMC Minutes – How Many Participants Believe “Substantial Further Progress” Has Been Achieved?: The Minutes from the Fed’s July meeting; which Fed Chair Powell described as the first deep dive into the timing, pace, and composition of the taper process; are scheduled for release at 1:00 p.m. CT.  There is a growing expectation that the timing of the Fed’s tapering process will begin sooner rather than later, with an announcement perhaps as early as their September 22nd meeting.  As of their June meeting Minutes, “The Committee’s standard of ‘substantial further progress’ was generally seen as not having yet been met.”

Housing Data Show Continued Weakness: Mortgage applications for the week ending August 13 fell 3.9% as purchase apps fell another 0.8% and refi apps dropped 5.3%.  The average 30-year mortgage rate rose 7 bps to 3.06%.  Purchase applications continue to point to a disappointing pace of home sales.  Also released this morning, July’s housing starts tally disappointed expectations, declining 7.0% MoM as single family starts fell 4.5% and multi-family dropped 13.1%.  Offering a sliver of optimism, building permits rose 2.6% MoM, but all of the gains came from an 11.2% gain in multi-family permits.  Single family permits fell 1.7%. The 3-month average for total new permits is now down 8.4% since March. 

Unseasonable Boost from Autos Lifts Industrial, Manufacturing Output Past Expectations: Industrial production and the manufacturing output component both topped expectations in July, helped out partially by a slight downward revision to June’s activity and an unseasonably small drop in auto production. Industrial production rose 0.9% last month, exceeding the 0.5% gain expected. The details showed a 2.1% drop in utilities usage was offset by a 1.2% gain in mining and a larger 1.4% jump in manufacturing output. The Fed’s press release noted, “About half of the gain in factory output is attributable to a [seasonally-adjusted] jump of 11.2 percent for motor vehicles and parts, as a number of vehicle manufacturers trimmed or canceled their typical July shutdowns.” On a non-seasonally adjusted basis, production of autos declined just 12.5% last month compared with an average monthly decline of 21.1% from 2015 to 2019. Still, the Fed cautioned that, “Despite the large [seasonally-adjusted] increase last month, vehicle assemblies continued to be constrained by a persistent shortage of semiconductors.” Excluding auto-related activity, manufacturing output rose 0.7% in July.

NAHB Home Builder Confidence Moderates for a Third Month to 13-Month Low: The NAHB’s gauge of home builder confidence dropped for a third month unexpectedly in August, sliding 6 points to its lowest level since July 2020. Notably, the index remains at a solid level in a broader historical context. While sales expectations for six months from now remained steady, the present sales index and the index tracking foot traffic of prospective buyers both declined 5 points to 13-month lows. Despite rates remaining low, low inventories and rising prices have led to a steady moderation of housing activity in recent months from an unsustainably strong pace of activity in the second half of 2020.

Prominent Fed Dove Says Tapering Later This Year “Reasonable”: Minneapolis Fed President Kashkari said Tuesday that “It is a question of when, not a question of if” the Fed will begin to taper its bond purchases of $120 billion each month. Coming from one of the most outspoken doves, the soft stamp of approval adds important momentum to the expectation that the Fed will slow down its purchases in the months ahead. “There’s a lot of public discussion about, will it be at the end of this year, will it be the beginning of next year; Those seem like reasonable ranges of deliberation, but ultimately it will be driven by the data,” Kashkari said.


TRADING ACTIVITY

Economic Data Trends Line Up With Tuesday’s Stock Shifts; Target “Not Seeing Adjustment in Consumer Behavior” Amid Delta: U.S. equities pulled back from record levels Tuesday as consumer-related stocks led a decline across most sectors. Ahead of the open of trading, shares of Walmart and Home Depot had declined on divergent earnings reports. Walmart beat analysts’ same-store sales expectations while Home Depot’s metric came up short. Shares of Walmart ended essentially unchanged while Home Depot stock tumbled 4.3%, dragging shares of its competitor Lowe’s down as well. Slowing sales at the home improvement retailer lined up with a fourth monthly decline in sales of building materials in the morning’s retail sales data. More broadly, retail sales disappointed expectations and, despite activity holding at a high level, comes just days after consumer confidence plunged in a preliminary August report. Shares of automakers also declined, congruent with weaker auto activity in the retail sales report and a note from the Fed about continued headwinds for production from the ongoing semiconductor shortage (more above). Home builders dropped after an update from the NAHB showed builder confidence at a 13-month low (more above). While the S&P 500 dipped 0.7%, the 2-year Treasury yield inched up 0.4 bps to 0.21% while the 10-year yield edged 0.3 bps lower to 1.26%.

Caution in global markets has continued into Wednesday’s session with uneven equity performances posted across Asia and Europe. U.S. equity futures were mixed and little changed before 7 a.m. CT despite encouraging earnings reports from a couple of major retailers. Contrary to Home Depot’s results, Lowe’s’ sales beat expectations and the company raised its full-year forecast. Similar to Walmart’s results, Target beat expectations and raised its full-year guidance, providing a contrarian view of consumer spending trends relative to a dip in retail sales in July, a plunge in consumer confidence in August, and some moderation in high frequency data since cases began to rise last month. Target’s CEO said, “We’ll monitor it carefully, but right now, we’re not seeing any adjustment in consumer behavior through the new variant.” While shares of Lowe’s have jumped in pre-market trading, Target stock is lower and S&P 500 futures were just below the flatline. Treasury yields were mixed around even after edging higher overnight, with the 2-year yield down 0.2 bps to 0.21% at 7:25 a.m. CT and the 10-year yield up 0.5 bps to 1.27%.


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