The Market Today

Fed’s July Minutes Confirm Tapering Likely to Begin This Year, Debate Continues about Specifics


by Craig Dismuke, Dudley Carter

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

As earlier reported, the U.S. officially recommended, subject to FDA evaluation and review by a CDC advisory panel, that most Americans receive a third booster shot eight weeks after their second dose of the Pfizer or Moderna vaccine. Officials also expect a booster will be needed for those who received the Johnson & Johnson vaccine, but are awaiting more data for confirmation. Boosters of the Pfizer and Moderna vaccines are expected to be available beginning September 20. A White House health adviser anticipates the U.S. will administer around 100 million booster shots by the end of the year. The administration will also require nursing homes to mandate vaccinations for their staff as a condition for receiving federal funds. Cigna said it will require employees to be vaccinated or subject to testing while Disney loosened mask requirements, making masking optional in more outdoor areas for park visitors. Israel said initial results show 86% effectiveness for boosters given to those 60 and older and Mexico announced emergency authorization of the Moderna jab.


ECONOMIC NEWS

Fed’s July Minutes Confirm Tapering Likely to Begin This Year, Debate Continues about Specifics: As noted in the July Policy Statement, the Fed’s Minutes from that meeting described a strengthening recovery that still faced risks from the virus and stronger-than-expected inflation which was generally expected to ease over time, although there were signs of some uncertainty around the inflation assessment. However, the focus was on the discussions around the tapering of asset purchases. Most Fed officials expected that “it could be appropriate to start reducing the pace of asset purchases this year,” assuming the recovery continued as they expected. More granularly, “various participants” expected the process could begin “in coming months” while “several others” believed it could become more appropriate “early next year.” There was also lengthy discussion on “risk-management considerations” in which multiple and divergent opinions were given. Despite the uncertainty related to timing, there was broad agreement that tapering should be a separate assessment from rate hikes and the process completed before conditions may warrant a change in the Fed Funds rate. Potentially the most enlightening discussion related to composition and the fact that most officials support a “proportional” tapering of Treasuries and MBS that would “end both sets of purchases at the same time.” There had been some growing speculation that MBS purchases may be tapered more quickly in response to strong demand for housing. The Minutes confirm tapering is likely to commence this year and will sharpen the focus on Fed Chair Powell’s Jackson Hole speech for any indication of whether an announcement may come in September or at a later meeting.

General Trend Remains Positive for Jobless Claims Despite Noise in Pandemic Programs: Total initial jobless claims for the week ending August 14 fell 23k to 457k as traditional state-level claims dropped 29k to 348k, the lowest of the pandemic.  Offsetting some of the improvement in traditional claims, initial pandemic-program claims rose 6k to 109k. Like the initial claims results, continuing jobless claims showed improvement in the traditional state programs (data covering the week ending July 7) but mixed results with the pandemic programs (data covering the week ending July 31).  Traditional continuing claims fell 79k to 2.82mm, a new low for the pandemic, as 37 states reported improved tallies.  Continuing PEUC claims (extension-of-benefits program) also declined, down 66k to 3.79mm.  Continuing PUA claims (expansion-of-eligibility program), however, rose 57k to 4.88mm.  Combined, total continuing claims for the week ending July 30 fell 312k to 11.74mm, the lowest since the onset of the pandemic.

Philly Fed Index Falls Further, Mixed Details: The Philly Fed report on regional manufacturing activity disappointed expectations, falling from 21.9 to 19.4. Some of the details, however, were positive. The new orders index rose along with the employment and average-workweek indices.  Indicators of the supply chain disruption were mixed: the delivery times index continued to pull back but the prices-paid and prices-received indices both increased.  The report is consistent with the New York Fed’s disappointing result released earlier in the week.

Leading Index: July’s leading index report, scheduled for 9:00 a.m. CT, is expected to increase 0.7%.


TRADING ACTIVITY

Markets Move After Fed Minutes Signal Taper Likely to Start in 2021, Uncertainty Remains: Stocks were generally weaker during morning trading while Treasury yields grinded gradually higher heading into the afternoon release of the Fed’s July Minutes. At 12:45 p.m. CT, the S&P 500 was down 0.2% and the 10-year Treasury yield was near its high mark of the day, up 3.0 bps to 1.29%. Shorter yields had also risen but by smaller amounts, pushing the 2-year yield 1.0 bp higher. Stocks became volatile after the Minutes confirmed signals from recent Fedspeak that most participants expected to begin tapering asset purchases this year (more above). Losses for the S&P 500 and Dow accelerated in the final hour of trading with both indexes closing down 1.1% and at the lows of the day. While there appears to be consensus support among officials to begin tapering this year, opinions remained divided on specifics related to timing, pace, and composition and risks to the outlook remained (more above). Treasury yields fell from the highs of the day when the Minutes were released and finished near session lows. The 10-year yield settled 0.3 bps lower at 1.26% while the 2-year yield added 0.2 bps to 0.22%.

Weakness has pervaded foreign markets Thursday and continued to pull U.S. futures lower following release of the Fed’s July Minutes. Confirmation in the Minutes that tapering is expected to begin this year confirms what Fed officials have said publicly in the weeks since the meeting, but comes at a time when there is growing uncertainty about the recovery amid global spread of the delta variant. The MSCI Asia-Pacific index dropped 1.7% and Europe’s Stoxx 600 was down 2.1% at 7:00 a.m. CT. Commodity-related companies saw their shares tumble as commodity prices weakened sharply. Iron ore, a key input into steel production, was down 5.6% at a more-than eight-month low. Oil prices were down more than 3%, pushing U.S. WTI below $64 a barrel, near a three-month low. Consumer-related stocks, including autos, were also hard hit globally. Toyota shares were a sizeable drag in Japan after the company announced a 40% cut to planned production in September “due to parts shortages resulting from the spread of Covid in Southeast Asia,” according to Bloomberg’s review of a company statement. The move provides an ominous sign for hopes persistent supply-chain disruption for the industry may ease soon. The wide-reaching risk-off bid dragged Treasury yields lower. Little impacted by the better-than-expected jobless claims data, the 10-year yield was 2.5 bps lower at 1.23% at 7:35 a.m. CT.


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