The Market Today
FOMC Meeting Begins – Taper Expected with Focus Turning to Hikes
by Craig Dismuke, Dudley Carter
FOMC Meeting Begins – Taper Expected with Focus Turning to Hikes: The Fed begins its two-day meeting today with expectations high that they will begin slowing their monthly bond purchases at tomorrow’s conclusion. With that first step in the unwinding of emergency policies taken, investor focus will turn to the timing of when they may hike rates. They are expected to fully end monthly asset purchases prior to a rate hike. Investors have become much more convinced that a hike will occur in 2022, even 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 meaningful influence on the level of longer Treasury yields.
Auto Sales: Wards will release the October auto sales numbers today with expectations for an increase from 12.18mm units (annualized) to 12.50mm units. Auto sales have been decimated in recent months by the lack of supply.
OTHER ECONOMIC NEWS
Manufacturing PMIs Show Persistent Supply Headwinds: The ISM’s Manufacturing Index fell less than expected in October as recoveries for employment and inventories and the effects of worsening supplier delays cushioned the index against a sizeable pullback in new orders. The headline PMI fell from 61.1 to 60.8, still near the top end of the pandemic range and a strong level historically. Employment picked up to a three-month high of 52.0 while production was essentially flat at 59.3. The biggest drag came from a 6.9-point decline in the new orders index to 59.8, solid historically but the lowest reading since June 2020. Nonetheless, there were plenty of anecdotes within the report indicating demand remained strong. While the inventories index hit its highest level since 1984, signaling broad accumulation, signs of supply constraints abounded. Supplier deliveries slowed, prices paid rose again, imports contracted for the first time since June 2020, and the comments section was chock full of complaints about incessant supply-chain woes that were holding back activity. Separately, Markit’s preliminary manufacturing PMI for October was revised down from 59.2 to 58.4, a third monthly decline to a new 2021 low.
September Construction Spending Disappoints: Construction spending fell unexpectedly in September and there was a net downward revision to the prior two months. The 0.5% decline to close out the third quarter was the first monthly contraction for total spending since February and was spread across both the public and private sectors and residential and non-residential categories. Private residential spending declined 0.4% while private non-residential spending dropped 0.6%, not a surprise considering residential and non-residential fixed investment declined in last week’s 3Q GDP report. Public spending slipped 0.7% as federal dollars spent contracted 4.3% and state and local activity slowed 0.4%.
The Quick Spending Vote Democratic Leadership Hoped for May Not Happen: Senator Manchin, a key Democratic voter, said last week that a framework for the social spending bill was possible soon. A couple of days later, President Biden revealed details of a slimmed-down $1.75 trillion package he said would have enough Democratic support to pass through Congress. However, Manchin called for a “complete analysis” of the effects of the plan Monday. “For the last three months, I’ve been straightforward…that I will not support a reconciliation package that expands social programs and irresponsibly adds to our $29 trillion debt,” Manchin said, adding “Nor will I support a package that risks hurting American families suffering from historic inflation.” He continued, “as more of the real details outlined in the basic framework are released, what I see are shell games, budget gimmicks that make the real cost of the so called $1.75 trillion bill estimated to be almost twice that amount if the full time is run out,” calling it a “recipe for economic crisis.”
Australia’s Central Bank Becomes the Latest to Officially Move Away from Emergency Policies: As expected, the Reserve Bank of Australia voted to keep its policy rate and asset purchase plans unchanged Tuesday but removed the 0.1% target it had placed on the April 2024 bond. The policy statement noted, “The decision to discontinue the yield target reflects the improvement in the economy and the earlier-than-expected progress towards the inflation target. Given that other market interest rates have moved in response to the increased likelihood of higher inflation and lower unemployment, the effectiveness of the yield target…has diminished.” Additionally, a previous statement that a rate hike was unlikely until 2024 was also removed. Nonetheless, the central bank continued to forecast patience. “While inflation has picked up, it remains low in underlying terms,” the statement noted, adding “The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. …This is likely to take some time.”
ICYMI – October 2021 Monthly Review: Equities hit records in October in response to better-than-expected corporate earnings while the Treasury curve flattened as investors contemplated a potentially quicker tightening of global monetary policy. The U.S. economy slowed dramatically in the third quarter and job growth failed to pick up in September as labor supply issues persisted. However, markets adjusted for a potentially quicker exit from easy monetary policy, by both the Fed and other central banks, as inflation pressures remained strong, both in the U.S. and abroad. Shorter sovereign yields jumped while a rise in longer yields was limited by concerns about future growth in the face of the more aggressive posture at global central banks. Click here for the full Monthly Review.
Stocks Hover Near Monday’s Records As Treasury Yields Inch Lower amid Global Decline: For a second consecutive session, each of the three major U.S. equity indexes closed at a record high while Treasury yields fluctuated ahead of the Fed’s meeting and update on hiring in October scheduled for later in the week. The Nasdaq led the way with a 0.6% gain while the Dow added 0.3% and the S&P edged 0.2% higher. Energy companies closed atop the S&P’s sector ladder as oil prices advanced while a rally in shares of Tesla led gains for the consumer discretionary sector that excluded major retailers. Monday marked the first time since late July that all three equity indexes closed at record levels in back-to-back sessions. Treasury yields had moved higher early in the day before fading in the afternoon to a mixed finish. A softer tone for manufacturing surveys and continued uncertainty about a possible reconciliation spending bill (more on both above) appeared to have little effect on investors’ psyche as they await the key economic developments later in the week. For the day, the 2-year yield edged up 0.2 bps to 0.50%, the 5-year yield closed 0.6 bps lower at 1.18%, and the 10-year yield inched 0.4 bps higher to 1.56%.
The market tone has softened somewhat Tuesday, evidenced by mixed global equity performances and a pullback in sovereign yields. Stocks were generally weaker across Asia and Europe’s Stoxx 600 inched down from a record high. The quieter trend kept a lid on U.S. equity futures with contracts on the major indexes mixed but little changed a couple of hours ahead of U.S. trading. Sovereign yields declined across both Europe and Asia with the sharpest retreats impacting peripheral European yields. As expected, Australia’s central bank scrapped its yield target (more above). Australian bond yields edged lower following a surge last week on speculation of the change. At 7:30 a.m. CT, the 2-year Treasury yield was 2.0 bps lower at 0.48%, the 5-year yield was down 1.5 bps to 1.16%, and the 10-year yield had edged 0.3 bps lower to 1.55%.