The Market Today
FOMC Day – Data Justifies Delaying, but Efficacy Warrants Proceeding
by Craig Dismuke, Dudley Carter
TODAY’S ECONOMIC DATA
FOMC Policy Decision: The FOMC is scheduled to release its Official Statement at 1:00 p.m. CT today along with its Summary of Economic Projections. Fed Chair Powell will host his press conference at 1:30 p.m. Speculation grew that the Fed would announce the tapering of its $120 billion in monthly asset purchases. However, conditions have changed notably since the Fed’s last policy meeting.
Evolving Economic Environment Portends Waiting: Since the July 28 FOMC meeting, financial conditions have tightened fractionally, the pace of the labor recovery has slowed, economic data have softened, and the headline and core CPI rates have eased up. This will be the first FOMC meeting at which the S&P is down from the prior FOMC meeting since the onset of the pandemic (April 2020 meeting). While the unemployment rate has declined from 5.9% to 5.2% over the intra-meeting period, the pace of payroll growth slowed in the most recent report to 235k (August). Full-year GDP growth forecasts have been slashed from 7.0% to 5.8% (Bloomberg Survey of Economists). Core CPI has pulled back from +4.5% YoY to +4.0% and the 5-year TIPs breakeven rates has declined 16 bps to 2.48%. Stoking the economic uncertainty, the U.S. has seen 4.4 times more COVID-19 cases over the last 30 days than the in the 30 days leading up the July FOMC meeting. Moreover, the odds of a government shutdown have increased, the Senate’s infrastructure package now appears headed for a rocky path to passage, and the outlook for the $3.5t social spending package is on the ropes.
The Reason to Proceed with Taper: The most compelling argument for the Fed to proceed with tapering immediately is that continued asset purchases are likely only compounding the economic imbalances that exist today. Unlike a typical economic cycle in which easy monetary policy is designed to boost aggregate demand, demand already exceeds supply today (see Chart of the Day).
SEP to Show Just How Data-Dependent Policymakers May Be This Cycle: Presuming that tapering is delayed until at least November, the most insightful communication today may come in the form of the Summary of Economic Projections (including the Dot Plot). The SEP will highlight the degree to which the recent inflation and COVID-19 developments have altered participants’ economic projections, a significant factor in determining the timing and pace of liftoff. Moreover, they are likely to give more insight into how Fed officials define “transitory.” Also key will be Fed Chair Powell’s press conference.
Mortgage Purchase Applications Continue Recent String of Gains: Mortgage applications for the week ending September 17 rose 4.9% on a 2.2% increase in purchase apps and a 6.5% gain in refi apps. While both categories of applications remain depressed versus their January-2021 levels, purchase apps now risen 15% over the past seven weeks. The average 30-year mortgage rate was unchanged at 3.03% for a fifth consecutive week.
The White House is expected to announce later today that it will donate another 500 million shots of the Pfizer vaccine, raising its total vaccine pledge to the world to more than 1 billion doses. Reports on Tuesday indicated the FDA would vote on Pfizer booster shots later today, before a CDC panel meets to discuss the need for a third dose. An FDA advisory panel overwhelmingly voted against boosters for all last week, later signing off on a recommendation that at-risk individuals and those 65 years and older be offered a third dose. Loosely related to the virus, House leadership said the chamber would hold a vote next Monday on the Senate’s bipartisan infrastructure bill for $550 billion in new spending that easily cleared that chamber in early August.
Markets Dawdle as Investors Await Fed Decision: The Dow and S&P 500 both edged lower Tuesday after some late-session selling erased modest gains the indexes accumulated and held for most of the day. Following declines of roughly 1.7% to start the week, the two indexes slipped around 0.1% as the Fed kicked off its two-day meeting. A cautious tone was not surprising in front of today’s highly anticipated Fed decision that will be accompanied by new projections, including rate expectations for 2024, and may hint at further progress towards tapering of asset purchases. With uncertainty rising in multiple theaters, the S&P 500 has fallen 3.7% so far this month. By the close of Tuesday’s quiet session, the 10-year yield had added 1.2 bps to 1.32% while the 5-year yield rose 0.5 bps to 0.83%. Despite the imminent release of the updated dot plot, the 2-year yield inched 0.2 bps lower to 0.21%.
Global markets are attempting to bounce again on Wednesday as a string of unrelated headlines filled the void between Tuesday’s market close and Wednesday’s afternoon Fed decision. The Chinese property developer driving some of the recent market concern disclosed a deal on interest payments on some local bonds, temporarily pausing fears of its financial collapse. U.S. House Democrats passed a bill Wednesday evening that would extend the government’s spending authority from September 30 to December 3 and suspend the debt ceiling until December 16, 2022. Republican leadership in the Senate has indicated members won’t support raising the debt limit, increasing uncertainty about a possible partial government shutdown on October 1 and the ability of the Treasury to make interest payments once extraordinary measures are exhausted, which the Treasury Secretary expects to occur sometime in October. Back in Asia, the Bank of Japan decided to keep monetary policy unchanged, citing the persistent risk to the outlook from the COVID-19 crisis. Europe’s Stoxx 600 was 0.7% higher on the heels of another down day in Asia. In the U.S., equity index futures were higher by around 0.5% and Treasury yields had ambled upward as market focus shifted to the Fed. At 7:30 a.m. CT, the 5-year yield was 1.0 bps higher at 0.84%, leading all increases, while the 10-year yield, unwinding an overnight rise, was unchanged at 1.32%.