The Market Today

Fed Continues Pivot as Economy Moves into Expansion


by Craig Dismuke, Dudley Carter

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

Google will reportedly mandate vaccines for workers returning to the office.  Apple and Disney both announced new mask requirements.  Data from Pfizer said the company’s vaccine efficacy drops to just 84% after six months. While Pfizer used that number to make recommendation for a third-shot booster, the vaccines appear to remain more effective than they were expected to be before Pfizer and Moderna announced 95% efficacy rates last December.

 

FOMC DECISION

Saying “The Economy Has Made Progress”, Fed Opens Door to Tapering: The FOMC kept policy unchanged yesterday, keeping its overnight target rate range at 0.00-0.25% and continuing asset purchases of $120 billion per month. The Official Statement contained three material changes. First, the assessment of the areas of the economy hardest hit by the virus was improved.  Second, the Statement was tweaked to note that the economy is now less dependent on the course of the virus. Third, and most relevant, they updated the economy’s progress on achieving the threshold of making “substantial further progress.” Included in the Statement was the acknowledgement that “the economy has made progress toward these goals.”  This acknowledgement opens the door to changes in policy at upcoming meetings.  The wording does not imply that tapering is imminent, but it surely puts the option on the table as the incoming data evolve. Notably absent in the changes to the Statement were any changes to the characterization of inflation.  With inflation already having risen higher than many Fed officials expected, the Statement continued to note that the increase is believed to “largely reflect transitory factors.”

Chair Powell Says Still Some Ground to Cover: Fed Chair Powell noted in his post-decision press conference that this meeting was the “first deep dive” into timing, pace, and composition of the taper process.  However, he pushed back on the notion of tapering imminently, reiterating several times that there is still some ground to cover on the labor market.


ECONOMIC DATA

GDP Headline Disappoints in 2Q as Inventory Rebuild Remains Delayed, Trade Deficit Continues to Grow, Housing Activity Slows: The U.S. economy expended a disappointing 6.5% in the second quarter.  Personal consumption lead the growth, up 11.8% QoQ, SAAR as consumer spending on services (+12.0%) rebounded sharply and spending on goods (+11.6%) remained elevated. Business investment in equipment also remained a solid engine of growth, expanding another 13.0%.  However, business spending on structures continued its losses, declining another 7.0%.  Particularly disappointing was a 9.8% drop in residential investment as housing unaffordability has taken a quicker toll on activity.  Government spending pulled back 1.5% as federal non-defense spending dropped 10.4% (transfer payments are not included).  State and local spending inched up 0.8%.  As for the two most volatile contributors to the GDP tallies, external trade dragged 0.5% from growth as imports (+7.8%) continued to outpace exports (+6.0%).  Inventories also dragged more than expected, subtracting 1.1% from the final tally as the supply chain remained embattled.  Both external trade and inventories are expected to eventually be tailwinds to growth. Also dragging the real GDP total lower was a 6.0% rate of headline inflation, up from 4.3% in 1Q. Overall output increased $303 billion, moving the cycle from the recovery phase to the expansion phase.  At $19.358 trillion (SA, ann.), the economy is now 0.8% larger than it was prior to the onset of the pandemic.

Jobless Claims Continue Gradual Improvement with Exception of Volatile Figures from California: Initial jobless claims for the week ending July 24 fell 39k as traditional state-level claims dropped 24k to 400k and PUA claims fell 15k to 95k. Continuing jobless claims for the week ending July 17 were expected to drop 53k. Instead, the previous week’s total was revised higher 26k and claims for the current reference week increased 7k to 3.269 million.  That, however, was the result of a 135k increase in California, alone, which has been prone to volatile reporting.  Elsewhere, 41 states reported decreases in continuing claims. Pandemic-program continuing claims for the week ending July 10 rose 211k, again almost entirely the result of increases in California which reported an increase of 473k.

Corporate Earnings: Amazon is scheduled to announce its 2Q earnings after the bell.


NOTEWORTHY NEWS

Bipartisan Senate Group Progressing on Infrastructure Package: The bipartisan group of ten Senators working on an infrastructure spending package agreed to terms on the major issues of a $1 trillion package. The agreement would bring spending $579 billion above baseline projections. The Senate voted to begin work on the bill shortly after the market close.  Democrats are separately working on a $3.5 trillion package, expected to be a party-line vote requiring reconciliation to pass, addressing climate, healthcare, education, and social services.


TRADING ACTIVITY

Treasury yields were down fractionally yesterday, evidence that the Fed delivered exactly as the market expected.  The 10-year and 2-year Treasury yields were both down less than a basis point to 1.233% and 0.202%, respectively.  Longer yields moved up overnight after hotter inflation reports out of the Eurozone and stronger-than-expected confidence reports.  Immediately after the U.S. GDP report, the 10-year yield rose as high as 1.28%.


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