The Market Today
Personal Income Spikes on Child Tax Credit Prepayments; All Eyes on Virtual Jackson Hole
by Craig Dismuke, Dudley Carter
Supreme Court Blocks CDC’s Targeted Eviction Moratorium: Additional companies announced vaccine mandates for their employees on Thursday, including Anthem and several big hedge funds, and Illinois’s governor issued a mandate for masking indoors. However, the biggest news came later in the evening after markets closed. The U.S. Supreme Court, on a 6-3 vote, struck down the CDC’s latest eviction moratorium, writing that, “If a federally imposed eviction moratorium is to continue, Congress must specifically authorize it.” The first moratorium was issued nearly a year ago by the Trump Administration and subsequently extended from June 30, 2021 to July 31 by the Biden Administration. With Congress taking no action, the moratorium lapsed at the end of July. On August 3, the CDC issued a new moratorium on evictions in areas of “substantial” or “high” virus transmission through October 3. In a Statement, the White House press secretary said, “In light of the Supreme Court ruling and the continued risk of COVID-19 transmission, President Biden is once again calling on all entities that can prevent evictions – from cities and states to local courts, landlords, Cabinet Agencies – to urgently act to prevent evictions.” Much of the roughly $47 billion in rental assistance passed by Congress as part of its various aid packages remains unused.
TODAY’S ECONOMIC CALENDAR
All Eyes on Zoom Call from Jackson Hole: All eyes will be on Fed Chair Powell’s speech at 9:00 a.m. CT this morning from Jackson Hole, virtually. As discussed yesterday, former Fed Chair Bernanke used his 2010 and 2011 speeches from Jackson Hole to signal imminent changes in monetary policy. The hawks at the Fed are hoping there is an inflection point on the taper topic sooner than later, as they have expressed over the past 24 hours (more below). Included in those sentiments are comments from Philadelphia Bank President Harker this morning that the economy is “far along” in meeting the criteria for tapering, and added that he questions the efficacy of ultra-loose policy when the economic challenge is not demand related, but rather a supply chain disruption (see Chart of the Day). Also commenting this morning, Cleveland Fed Bank President Mester said she is comfortable having the taper discussions in September, would like to begin the process this year, and would like to conclude purchases by mid-2022. She was less specific than yesterday’s speakers in citing September as the appropriate commencement date.
Personal Income Spikes on Partial Prepayment of Child Tax Credits and Strong Wage Gains: Personal income jumped 1.1% in July, a much larger gain than was expected, on strength in employment income and another increase in government transfers via the start of pre-payments of the child tax credit. Employment wage income gained a solid 1.0% MoM (+$99b) but government transfers outpaced even this labor strength, rising $120b MoM. “Other government transfers” increased $172b which more-than-offset the $53b decrease in unemployment transfers. The monthly prepayment of half of the enhanced child tax credit which commenced in July accounts for this increase. This may further exacerbate the imbalance between demand and supply. Personal spending rose just 0.3% MoM bringing the savings rate up from 8.8% to 9.6%, the first increase since the American Rescue Plan direct payments. Also in the report, the Fed’s preferred measure of inflation showed consumer prices gains in July in-line with expectations, rising 0.4% MoM at the headline level and 0.3% MoM at the core level. Headline PCE inflation is now up 4.2% YoY while core is up 3.6% (unchanged from June’s level).
Trade and Inventory Tailwinds: The advanced goods trade balance data showed a smaller-than-expected monthly deficit in July, down from $91.2b in June to $86.4b. Imports fell 1.4% MoM while exports rose 1.5%. While overall goods trade fell 0.3% MoM, this is a positive start for the external trade data as it relates to its impact on U.S. GDP. Also released this morning, the inventory rebuild continued in July with wholesale inventories rising 0.6% MoM and retail inventories rising 0.4%.
YESTERDAY’S ECONOMIC NEWS
Pre-Powell Fed Chatter Showed Hawks Persistent in Desire to Start Tapering: Prior to Chair Powell’s speech this morning at the Fed’s virtual Jackson Hole Symposium, several hawkish-leaning regional bank presidents, at least as it relates to tapering asset purchases, reiterated Thursday their desire to start the process soon. While still open to debate about some of the finer details, Fed President George said, “I think it’s important to get [the tapering process] started.” President Bullard followed George, reiterating that the Fed should “get going” so that monthly purchases can be fully wound down by the end of the first quarter of next year, giving the Fed optionality in the event that stronger inflation persists longer than others expect. President Kaplan said later, “It would continue to be my view that when we get to the September meeting, we’d be well served to announce a plan for adjusting purchases and begin to execute that plan in October or shortly thereafter.” Kaplan said he currently believes the process should take place over a period of roughly eight months, bringing asset purchases to an end somewhere near the middle of next year. Importantly, each of these Fed officials had previously stated similar positions, although Kaplan last week made some headlines by showing an openness to delaying his taper support if Delta began to more heavily impact the economic data.
Pre-Powell Fed Talk and Deadly Attacks in Kabul Weighed on Sentiment Thursday: A surge of infections in the U.S. since early July has been blamed for a recent slowing in some high-frequency economic datasets and weakening in consumer and business confidence measures in August. Against that backdrop, the probability of tapering fireworks in today’s speech from Chair Powell had receded, particularly after Minutes from the Fed’s July meeting showed officials remained divided on program specifics. As a result, overnight markets had been relatively uneventful Thursday ahead of U.S. trading. However, investors became more attentive just before the U.S. open as several Fed hawks repeated their support for starting to taper soon (more above) and geopolitical risks intensified after blasts near the airport in Kabul led to casualties, including members of the U.S. military. Stocks, seemingly unnerved by the developments, quickly erased opening gains and pulled back from record levels. The three major indices ended the day down around 0.6%. The remarks from Fed officials were closely aligned with separate, noticeable jumps in the Dollar and 10-year Treasury yield. The bid for the Dollar strengthened as the situation in Afghanistan deteriorated while Treasury yields declined with equities. The 10-year yield ended the day up 1.0 bps at 1.35%, below an earlier high above 1.37%.
While any news out of Afghanistan will certainly be a continued focus of the headlines, investors will finally hear from Fed Chair Powell this morning. Prior to his speech, and before the release of the latest consumer income and spending and PCE inflation data, Treasury yields were little changed at 7 a.m. CT while U.S. futures pointed to some recovery, despite a continued soft tone in foreign markets. After pulling back in sync on Thursday, index futures on the S&P 500, Dow, and Nasdaq rose together early Friday, each up around 0.2%. Treasury yields had lazily drifted lower by less than 1 bps across the curve just before the morning data releases. At 7:40 a.m. CT, following the release of the economic data, the 10-year yield was 1.3 bps lower at 1.34%.