The Market Today
Inflation Concerns Continue to Grow
by Craig Dismuke, Dudley Carter
The White House unveiled its Path Out of the Pandemic plan yesterday mandating vaccines for all federal workers, contractors working with the government, healthcare employees working in Medicare- and Medicaid-participating facilities, and all staff involved in Head Start programs and Department of Defense schools. The plan also requires businesses with 100+ employees to mandate vaccines or obtain negative tests weekly for unvaccinated employees. The plan calls on all states to require vaccines for all school employees.
Producer Prices Boosted by Recovering Transportation Prices, but Still Add to Inflation Concerns: Producer prices rose 0.7% MoM in August, bringing the year-over-year rate up from 7.8% to 8.3%, as the production pipeline persists in adding to inflation pressure. Boosting the headline figure was a 9.0% increase in transportation prices for people as airfares continue to recover at an uneven pace. Core goods prices rose 0.6% MoM, in-line with their 12-month average, while services rose at a more brisk 0.7% MoM. Food prices, now a growing concern, jumped 2.9% MoM, their third largest monthly increase since the PPI data were transformed in 2010. Excluding food and energy, core prices for final demand items rose 0.6% MoM bringing the YoY rate up to 6.7%, its highest since 2010.
Economic Projections, Inventories, and Fedspeak: The Bloomberg Survey of Economists is scheduled for release at 8:00 a.m. CT. At 9:00 a.m., July’s wholesale inventories data will be finalized. Speaking from a conference in Finland this morning is Cleveland Bank President Mester.
Yesterday’s Trading – Risk-Off Continues: After digesting the ECB’s announcement paring monthly asset purchases and decent jobless claims data, stocks dipped and yields declined yesterday. The 10-year Treasury yield dropped another 4 bps on the day bringing it below 1.30%, back into its pre-payroll range despite the Treasury issuance this week. The 30-year bond auction saw surprisingly strong demand leaving dealers with a record-low 13.1% of the $24 billion auction. The 30-year opened the day at 1.96% but traded as low as 1.89% after the auction. The S&P fell for a fourth consecutive day, down 0.5%.
Overnight Trading – Reversal: Treasury yields are higher along with equity futures coming into today’s trading. The 10-year yield has grinded steadily higher and is trading above 1.32% as of 7:00 a.m. CT. Both DJIA and S&P futures point to the indices recovering most of their losses from yesterday. A reported phone call last night between President Biden and China’s Xi has given some cause for optimism and sentiment has grown that the taper process will be delayed – at the very least, beyond September.
Chicago’s Evans Highlights Elevated Uncertainty: Chicago Bank President Evans acknowledged increased uncertainty in comments yesterday. He said, “After the deep and sharp downturn in economic activity last year, we have seen strong economic growth. However, challenges abound, as evidenced by widespread bottlenecks in supply chains and labor markets. … A common element in all this continues to be high uncertainty — as new variants of the Covid-19 virus are impacting health and safety across the country.”
Atlanta’s Bostic Still Sees 2021 Taper, but Pushes Back on September Announcement: In a WSJ interview, Atlanta Fed Bank President Bostic hinted at delaying the appropriate timing for tapering. He said, “The weaker data that we’ve seen more recently suggests to me that maybe there’s a chance for some play on this [timing of taper], but I still think that sometime this year is going to be appropriate.” As it relates to the September 22 FOMC Meeting, he said, “I wouldn’t lean in too heavily to expecting anything on taper at the next meeting.”
Fed Governor Bowman Expects 2021 Taper: Fed Governor Bowman weighed in on the taper timing, sounding a similar refrain from Powell, Williams, et al. She said, “If the data comes in like I expect that it will, then it will likely be appropriate for us to begin the process of scaling back our asset purchases this year.”
OMB Doubles More-Than-Doubles Inflation Forecast for 4Q: The White House’s Office of Management and Budget revised higher its inflation forecast for 4Q21, up from 2.0% in May’s forecast to 4.8%. However, like the Fed and many private-sector forecasters, they expect the above-target inflation to pull back nearer the Fed’s 2% objective over the course of 2022 and 2023. The OMB revisions peg inflation at 2.5% in 2022 and 2.3% in 2023.