The Market Today

Fed Officials Diverge on Path Forward; Powell Relatively Firm on Transitory View


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Mortgage Applications Remain Modest: Mortgage applications for the week ending June 18 rose 2.1% despite the 30-year mortgage rates ticking up 7 bps to 3.18%.  Purchase applications inched up 0.6% while refi apps gained 2.8%.  Both types of applications have weakened in 2021 and have since remained in a holding pattern.

Markit PMIs: The U.S. Markit manufacturing and services PMIs will be released at 8:45 a.m. CT.  Both are expected to pull back from May’s very strong level.  May’s new home sales data are expected to show a slight uptick in sales.

Fedspeak: Fed Governor Bowman is scheduled to speak at 8:00 a.m. CT, followed by Atlanta Bank President Bostic at 10:00 a.m. and Boston Bank President Rosengren at 3:30 p.m.  Bostic votes this year while Rosengren will vote in 2022.


24 HOURS OF MARKET ACTIVITY

Stocks Recover Toward Records as Post-Fed Slump Abates: Stocks rose again Tuesday, led by an 0.8% gain that pushed the Nasdaq to a new all-time high. Strength in tech shares also helped boost the S&P 500 and was only outpaced by a gain for consumer discretionary companies. Support for the index was widespread, however, with nine of the index’s 11 sectors closing higher on the day. Stocks were beat up last week by officials bringing forward the timing of possible rate hikes in the Fed’s most recent projections, but have recovered in two consecutive sessions. A couple of Fed officials have signaled support for the Fed’s hawkish tilt while several others on Tuesday, including Chair Powell, said more time is needed before deciding anything definitively (more below). As markets continue to digest and balance the Fed developments, Treasury yields drifted down on the day. The 2-year yield edged back 2.6 bps from Monday’s closing level above 0.25%, which had marked the highest level since April 2020. The 10-year yield slipped by a similar amount, falling 2.5 bps to 1.463%.

Despite another round of strong PMIs, Europe’s Stoxx 600 was 0.3% lower following a mixed Asian session. The Eurozone’s Composite PMI rose from 57.1 to 59.2 in June, a fourth consecutive month of expansion and its highest reading since June 2006. Driving the gains, the services PMI rose from 55.2 to 58.0, its best level since January 2018. The manufacturing index was unchanged at May’s record-high pace, beating expectations for a small decline. Although delayed relative to the U.S., the Eurozone’s recovery is picking up amid a better health situation driven by an improved vaccination rollout. Similar to developments in the U.S., increased reopening has released pent-up demand for services activities, with new business orders near a 14-year high, but is also pressuring prices higher. The prices paid index from the manufacturing survey rose to its highest level in records since 1997. With the U.S. PMIs on deck, U.S. equity futures were slightly positive at 7:30 a.m. CT while Treasury yields were little changed despite broad declines in European rates.


NOTEWORTHY NEWS

Existing Home Sales Slipped Less than Expected in May, But Cooled for Fourth Consecutive Month: Sales of existing homes cooled 0.9% last month to 5.8 million annualized units, better than the 2.1% expected decline to 5.73 million units but showing that low inventories and rising prices continue to weigh on activity. The 5.8-million-unit pace was nearly 14% lower than last October’s peak and the slowest pace since last June. On a non-seasonally adjusted basis, the pace of monthly improvement slowed from 6.0% to 2.9% and May marked the first month in 2021 that non-seasonally adjusted sales were not at their highest monthly level since 2006. Steep price increases continue to be cited as a primary issue, particularly for first-time home buyers, as inventories remain sparse. The median price of a home sold in May was 23.5% higher than a year ago at $350k, both metrics representing records for their respective series. While slowing activity has nudged months of supply in inventory higher, the 2.5 level for May still marks an historically low level.

Richmond Fed Manufacturing Index Rises on Mixed Details: The Richmond Fed’s Manufacturing Index rose unexpectedly in June, contrasting modest cooling evidenced in most other previously released regional Fed surveys. The 4-point gain pushed the index to its highest level since October and was primarily the result of stronger orders. Amid mixed details, employment was expected to improve.

Mester Expects Outlook to Clear Up Over the Summer: Cleveland Fed President Mester expects PCE inflation of between 3% and 3.5% this year before it returns to around 2% in 2022. While acknowledging that “risks to inflation are to the upside,” she also said she wants to see more progress for employment, “especially on labor-force participation.” “When we get to September, I think we’ll have a little more clarity and then we can make decisions about our monetary policy,” she said. Mester, who will vote on policy decisions in 2022, wouldn’t reveal the location of her dot in last week’s updated projections, only saying it will still be some time until the Fed thinks about raising interest rates. Contrasting St. Louis President Bullard’s criticism of the 2014 tapering approach, Mester said that plan provides a good starting point for current discussions.

Williams Watching Data to Determine When to Make Taper Decision: New York Fed President Williams said there is no formula for gauging “substantial further progress” and that the decision of when to begin tapering bond purchases will depend on how the data evolve over the coming months. He repeated that he sees inflation moderating next year back close to 2% and said the labor market has a long way to go to reach full employment. Similar to the approach of his colleague from Cleveland, Williams wouldn’t disclose his dot path in June’s market-moving dot plot but said raising the fed funds rate remains “quite a ways off.”

Daly Said “Substantial Further Progress” Could Be Made By Late 2021, Awaiting More Clarity in the Fall: San Francisco Fed President Daly, who currently votes on monetary policy decision, said the economy could meet the threshold for tapering asset purchases late this year or early in 2022, but emphasized that “we’re not there yet.” Similar to President Mester, she anticipates having greater clarity on underlying economic trends later this fall.

Fed Chair Powell Persistent in Support of Transitory Inflation Argument: In his testimony before a House subcommittee, Fed Chair Powell reiterated his belief that strong current inflation readings will prove transitory. Following the recital of a list of reasons that explain why data suggest inflation is heating up, Powell said, “As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal.” Powell later added that, “A pretty substantial part or perhaps all of the overshoot in inflation comes from categories…directly affected by the reopening of the economy.” He noted, however, that, “We have to be very humble about our ability to really try to draw a signal out of it. It might take some patience to really see what’s happening.” Several factors are holding back hiring – health concerns, school closures, time needed to find a new job, and enhanced unemployment benefits – but should “abate and wane and go away over the course of the coming months.” “I strongly suspect that labor supply and job creation will be moving up well over the rest of this year,” Powell said.

Bostic Believes Transitory Inflation May Take A Bit Longer to Subside: Atlanta Fed President Bostic, a current-year voter, said earlier Wednesday morning that stronger inflation should subside, but that “temporary is going to be a little longer than we expected initially…Rather than it being two to three months it may be six to nine months.” Discussing the 7.6-million-job shortfall in employment levels relative to just prior to the pandemic’s onset, Bostic advised, “That is a benchmark we all need to keep our eye on. …We have to make sure our policies don’t pivot in ways that make it look like we are declaring victory prematurely.”


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