The Market Today
Fed Officials Repeat Communications
by Craig Dismuke, Dudley Carter
TODAY’S ECONOMIC DATA
Goods Trade Continues Higher but Deficit Remains Large: The advance goods trade deficit was larger than expected in August, up $0.8b to $87.6b from a revised-higher July deficit. Imports rose 0.8% MoM while exports gained 0.7%. Overall trade volume grew 0.8% for the month bringing it up 33.7% from its May 2020 nadir. However, the convergence of exports with import growth has yet to materialize (see Chart of the Day).
Inventory Rebuild Slogs Along: Wholesale inventories climbed 1.2% MoM in August, beating expectations, while retail inventories rose a less encouraging 0.1%. The inventory rebuild remains slow despite the surfeit of demand as one issue after another bogs down the global supply chain.
Home Prices and Consumer Confidence: At 8:00 a.m. CT, the FHFA and S&P CoreLogic Home Price indices are both expected to show the pace of monthly price gains slowing after cresting in late-spring. At 9:00 a.m., the Conference Board’s September report on consumer confidence is expected to partially recover from August’s sharp decline. Also at 9:00, the Richmond Fed report on regional manufacturing conditions in September is expected to inch higher.
More Fedspeak: Fed Chair Powell is scheduled to speak along with Treasury Secretary Yellen before the Senate banking panel today at 9:00 a.m. CT. As highlighted below, Powell’s prepared remarks echo last week’s communications. Also speaking today are Chicago’s Evans (8:00 a.m.), Governor Bowman (12:40 p.m.), Atlanta’s Bostic (2:00 p.m.), and St. Louis’s Bullard (6:00 p.m.).
YESTERDAY’S ECONOMIC NEWS
Dallas Fed Index Extends Recent Drop in September: The Dallas Fed’s Manufacturing Activity Index fell unexpectedly in September, notching its fifth consecutive decline to a 14-month low. Weaker orders activity offset a pick-up in production and shipments and better reading on employment. Notably, current inflation indicators rose and remain high. The prices paid index, a measure of what businesses pay for raw materials, rose back near June’s record high while the prices received index, what businesses charge their customers, hit a new all-time high. Supply chain delays also increased but held below more severe levels earlier this year. On balance, the forward-looking indicators were also softer.
Chicago Fed President Evans, a current-year voter, kicked off a busy week of Fed commentary, saying the economy is “close” to making enough progress to begin tapering asset purchases while cautioning that the path to raising rates is “much less clear to me.” He expects much of inflation’s overshoot will prove transitory and not sufficient to “appropriately align long-run inflation expectations” with the Fed’s 2% target, a development he said will be the “determinative criterion for the path of policy rates going forward.”
New York Fed Bank President Williams, a perennial voter, echoed a sentiment similar to Evans. Repeating the new language from last week’s policy statement, Williams believes tapering bond purchases “may soon be warranted” if the economy continues to improve. However, he is less certain about the path for the fed funds rate. Williams noted, “There is still a long way to go before reaching maximum employment, and over time it should become clearer whether we have reached 2 percent inflation on a sustained basis.” Williams is forecasting that inflation will fall back to “around 2%” next year as “highly unusual dynamics” and “pandemic-related swings in supply and demand gradually recede.”
Fed Governor Brainard said the Delta variant has “slowed progress on employment,” “limited the acceleration in services spending,” and “prolonged supply bottlenecks” that are a key driver of current elevated inflation readings. However, she expects “inflation to decelerate, and pre-COVID inflation dynamics to return” and sees “no reason employment should not reach levels as strong or stronger than before the pandemic.” Currently, the labor market “is still a bit short” of the substantial further progress needed to taper but “may soon meet the mark.” Looking ahead to possible liftoff, she noted that it’s important “to avoid placing too much weight on an outlook that remains highly uncertain.”
Fed’s Powell to Tell Senators Inflation Will Remain Elevated before Abating: Fed Chair Powell’s prepared remarks for today’s Senate testimony were published late Monday afternoon and, not surprisingly, stuck close to the script from last week’s press conference. Powell will tell Senators on the Senate Banking Committee that inflation will remain elevated before falling back toward target, largely because disruptions to the supply chain and other supply-related bottlenecks have persisted for longer than previously expected.
Fed Officials Criticized for Personal Trading During Fed’s Market Interventions to Retire: Boston Fed President Eric Rosengren announced early Monday that he “will move up his long-planned retirement from June 2022 to September 30 of this year,” citing a health condition. Rosengren has been ensnarled in controversy recently related to annual financial disclosures showing he actively traded financial investments last year as the Fed implemented emergency policies, including buying a wider-than-normal range of financial assets, to shore up markets and the economy. Later Monday, Dallas Fed President Kaplan, who is also caught up in the trading controversy, said he will retire on October 8. In a statement, Kaplan said, “The Federal Reserve is approaching a critical point in our economic recovery as it deliberates the future path of monetary policy. Unfortunately, the recent focus on my financial disclosure risks becoming a distraction to the Federal Reserve’s execution of that vital work.” Both officials’ transactions were said to be in compliance with all Fed ethics rules but sparked an outcry and led the Fed to announce a formal review of its trading regulations.
Incessant Rise in Bond Yields Begins to Weigh on Stocks: Stocks struggled Monday as Treasury yields added to recent gains made since the Fed said it may taper soon and signaled an increased possibility for an earlier increase of the fed funds rate amid persistent inflation pressures. The S&P 500 opened lower and only briefly broke into positive territory before falling back to end the day down 0.3%. Despite the overall loss, sector shifts reflected some lingering optimism. Energy companies rallied more than 3% as U.S. WTI rose to near three-year highs amid continued strength in energy commodities more broadly. Other economically sensitive sectors also gained. While some safer sectors slipped as Treasury yields rose further, financials improved by more than 1.3%. Following jumps on Thursday and Friday of last week after the Fed and Bank of England indicated emergency policies may be nearing their end, the 10-year yield rose 3.6 bps to 1.49%, its high-mark since late June. The key U.S. yield had crossed above the technically interesting level of 1.50% overnight. The 5-year yield added 3.8 bps to 0.99%, its loftiest close since February 2020, as the 2-year yield settled up 0.8 bps to 0.28%, a high since March 2020.
The rise for bond yields continued overnight Tuesday and appeared to finally unnerve global equity investors. Stocks closed mostly lower across Asia before the Stoxx Europe 600 slumped 1.2% and U.S. futures pulled back. The Nasdaq’s 1.5% decline outpacing the S&P 500’s 0.8% drop and the Dow’s 0.3% fall provided some evidence that higher yields were hurting sentiment. Treasury yields rose further as part of another increase in global sovereign yields as central banks begin to shift away from emergency-era policies amid higher inflation. As of 7:30 a.m. CT, the 10-year Treasury yield was 4.9 bps higher at 1.54%, a new high since mid-June, while the U.K.’s 10-year yield jumped 7.0 bps to 1.02%, also a high since June. Since last Wednesday, the U.S. and U.K. 10-year yields have risen 24 bps and 22 bps, respectively. The 2-year Treasury yield was 1.0 bps higher at 0.31% and the 5-year yield added 2.6 bps to 1.03%.