The Market Today

Fed Expected to Begin Unwinding Emergency Policies


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

FOMC- Taper Expected with Focus Turning to Hikes: The Fed is scheduled to announce its monetary policy decision at 1:00 p.m. CT followed by a press conference from Chair Powell at 1:30 p.m.  They are expected to announce the tapering of their $120 billion in emergency monthly bond purchases.  The September meeting Minutes indicated they are likely to reduce monthly purchases by $15b, $10b in Treasury purchases and $5b in MBS purchases. With inflation pressures growing, it appears likely that they will begin tapering in mid-November rather waiting until mid-December, one of the options presented in the September Minutes.  If tapering were to continue at a pace of $15b per month and begin mid-November, the purchases would conclude in June.  This will set the foundation for the next discussion: when the first rate hike will occur. Fed Funds futures contracts show that investors have become more convinced a hike will occur in 2022, and are now beginning to question “how many” hikes may occur next year.  Perhaps an even more important question will be how high the Fed can eventually take its overnight target rate. For now, Fed Funds futures contracts reflect the belief that the terminal rate will be somewhere just below 2.00%.  History says this perceived terminal rate should have a meaningful influence on the level of longer Treasury yields.

ADP Projects Better Rate of Labor Recovery in October: ADP projects the economy recovered a stronger-than-expected 571k private payrolls in October, the best projected gain since June but still leaving 5.05 million private sector jobs lost.  September’s projection of 568k was revised down to 523k after the September NFP release showed just 317k private payrolls recovered. Goods-producing payrolls are expected to continue strengthening with manufacturing and construction sectors both expected to see their best month of the year.  Services-providing industries are expected to see positive payroll gains, but at a pace that is reduced from the strongest period of the year (March-to-June). While the ADP report is encouraging heading into this Friday’s NFP release, predicting payroll growth has been difficult post-pandemic.  The ADP report has missed the BLS’s private payroll tally by an average of 289k per month in 2021.

Mortgage Applications Decline Despite Lower Rates: Mortgage applications for the week ending October 29 fell 3.3% as purchase apps dropped 1.6% and refis fell 4.3%.  The average 30-year mortgage rate fell from 3.30% to 3.24%.

Services PMIs and Factory Orders: The final revision to the October Markit Services PMI (8:45 a.m. CT) is expected to be unchanged at 58.2.  The October ISM Services Index (9:00 a.m.) is expected to inch up from 61.9 to 62.0.  Key in the report, apart from the new orders and employment indices, will be the supplier deliveries and prices paid indices – two indicators of the persistent supply chain issues and the impact this is having on inflation.  Also released today will be the September Factory Orders report (9:00 a.m.), including the final revisions to the capital goods orders and shipments data.


OTHER ECONOMIC NEWS

Auto Sales Stabilize at a Notably Weak Level: Last week’s first look at GDP growth in the third quarter showed a 54% (SAAR) contraction in auto-related consumer spending knocked 2.4% off growth during.  While still sharply depressed for non-recessionary periods, the hemorrhaging for auto sales stabilized in October. Sales of new autos rose from an annualized pace of 12.18 million in September to 12.99 million, edging out expectations for a 12.5-million pace but still holding at the second weakest level since May 2020. The chip shortage has led to pared-back production and a dearth of inventory that has driven prices higher and severely depressed sales.


TRADING ACTIVITY

U.S. Equities Extend Record Push as Yields Pull Back before the Fed: U.S. equities climbed between 0.3% and 0.4% to records again on Tuesday amid additional corporate earnings results, while shorter Treasury yields declined as part of a global pullback in sovereign rates. Earlier in the day, Australian yields fell back after a sharp surge in the prior week which correctly anticipated Tuesday’s central bank decision to abandon a yield target it had put in place to keep the front end of the curve anchored to support the recovery. By Tuesday’s close, the Treasury curve was steeper as the 2-year yield declined 4.9 bps to 0.45% while the 10-year yield edged just 0.7 bps lower to 1.55%. The market’s focus has shifted overnight to this afternoon’s Fed announcement, with a brief detour to digest this morning’s ADP payroll report. Yields were lower and flatter ahead of the update on hiring in the private sector in October, with the 2-year yield unchanged while the 10-year yield dipped 2.1 bps to 1.53%. Against a backdrop of mixed and minor moves for equities in Asia and Europe, U.S. stock futures were hovering around unchanged for the session. Yields edged slightly higher from those levels following the solid ADP estimate.


CORONAVIRUS UPDATE  Vining Sparks Coronavirus Chartbook and Vining Sparks Coronavirus State Charts

CDC Formally Supports Pfizer Shots for Ages 5 to 11: The CDC officially granted clearance for the Pfizer vaccine to be given to children between the ages of 5 and 11 after a panel of external advisers voted in support of the measure. The FDA had provided emergency use authorization last week.


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