The Market Today
Slower Expansion, Faster Inflation – Taper Soon with Rate Hikes to Follow
by Craig Dismuke, Dudley Carter
TODAY’S ECONOMIC DATA
Initial jobless claims for the week ending September 18 rose 8k to 366k as traditional state-level claims gained 16k to 351k and PUA claims fell 8k to 15k. Traditional state-level claims have now disappointed expectations in consecutive weeks. Continuing jobless claims also disappointed, with traditional claims rising 131k for the week ending September 10 to 2.85mm. Pandemic-program continuing claims fell 752k to 8.54mm on a 161k drop in continuing PEUC claims and a 591k drop in continuing PUA claims. With only one week remaining in the pandemic programs, there remain 8.54mm people receiving some form of assistance. While this week’s claims data were disappointing, continued volatility in the reporting from a handful of states dominated the results. California, alone, reported outsized gains of +24k (NSA) initial jobless claims, +61k traditional continuing claims, +184k PEUC continuing claims, and +251k PUA continuing claims.
Markit PMIs, Regional Manufacturing Activity, Household Net Worth: The preliminary September Markit PMIs on manufacturing and service-sector activity are scheduled for 8:45 a.m. CT and are expected to inch lower. At 9:00 a.m., the August Leading Index is scheduled for release. The Kansas City Fed report on regional manufacturing activity is expected to decline at 10:00 a.m. Finally, the 2Q Flow of Funds report showing the quarterly change in household net worth is scheduled for 11:00 a.m.
YESTERDAY’S ECONOMIC NEWS
FOMC: Slower Expansion, Faster Inflation – Taper Soon with Rate Hikes to Follow: No policy changes were announced at the conclusion of yesterday’s meeting, but the Official Statement and Summary of Economic Projections, collectively, provide notice that they expect to begin reducing accommodation soon. The Statement noted that “moderation in the pace of asset purchase may soon be warranted.” Fed Chair Powell confirmed in his press conference that the announcement “could come as soon as the next meeting” and disclosed that there was support for completing the process by “sometime around the middle of next year.” More broadly, the growth outlook was cut this year from 7.0% to 5.9%, some of that recouped in a stronger expectation for next year. PCE inflation for 2021 was revised up from 3.4% to 4.2% while core was revised up from 3.0% to 3.7%. The path for core inflation was also higher than in June throughout the forecast horizon, slowly moderating to an above-target 2.1% by 2024. Chair Powell attributed most of the increase in officials’ inflation forecasts to the fact that supply-side issues affecting the economy have “really not begun to abate in any meaningful way yet.” While stronger inflation was still expected to be transitory, refreshed rate projections showed officials, uncomfortable with their higher inflation forecasts and the above-target path over the horizon, contemplating a possible rate hike as soon as next year. The number of officials projecting liftoff to occur in 2022 grew from 7 to 9 (of 18 participants), implying a 50/50 chance for the first rate hike. The median 2023 dot was raised to 1.00%, implying three rate hikes that year, while the first publication of the 2024 forecast showed a median period-end rate of 1.75%, implying another three hikes in 2024.
August Decline Keeps Existing Home Sales Well Below Pandemic Peak, But at Strong Level in Pre-Pandemic Terms: Existing home sales fell 2.0% in August, a larger decline than the 1.7% drop economists expected which roughly equaled the average two-month decline for pending sales in June and July. As is true of most current housing data, the drop kept the pace of existing home sales well below stronger paces from around the turn of the year but at solid levels relative to pre-pandemic history. The seasonally adjusted pace of 5.9 million units compared to an average 6.7-million unit pace from October 2020 through January 2021. However, on a non-seasonally adjusted basis, the sales pace was the strongest for the month of August since 2006. Activity slowed in all four regions last month, led by a 3.0% drop in the South. Months of supply was unchanged at 2.6, an historic low for August, and first-time buyers accounted for the smallest share of sales since 2019 according to the NAR. However, annual price gains moderated. The median price of $356.7k represented a 14.9% annual gain, the smallest increase in six months.
Stocks Rose and the Treasury Curve Flattened after the Fed Signaled November Taper Announcement, Dots Contemplated 2022 Liftoff: U.S. equities rose into and out of the Fed’s afternoon decision, leaving the three major indexes up 1.0% on the day. As discussed above, the Fed signaled that tapering was likely to be announced in November and Chair Powell said concluding the process around the middle of the year seemed appropriate. Despite acknowledging in the statement that Delta led to slower activity and less labor market momentum, energy stocks led all gains and cyclical sectors charged ahead. Financials closed in second place, despite the Treasury curve flattening in response to the new dot plot showing more officials leaning toward a rate hike this year followed by a possible three hikes in both 2022 and 2023. Shorter yields rose after the latest projections were released, the 2-year yield climbing 2.2 bps to 0.24% as fed funds futures in those out years repriced for a steeper path. The 5-year yield added 2.1 bps to 0.85%. Longer yields, however, declined. The 10-year yield fell 2.2 bps to 1.30% while the 30-year Bond dropped 4.8 bps to 1.81%, its lowest level since January 28. The spread between the 2-year and 10-year yields tightened 4.2 bps to 106.2 bps, a low back to August 23. The spread between the 5-year and 30-year yields collapsed 6.7 bps to 95.6 bps, the flattest since July 2020.
Bank of England Signals “Modest” Tightening Amid More Persistent Inflation Risk: Longer Treasury yields partially reversed Thursday’s declines and global equities rose as the Fed’s decision passed and a jump in U.K. yields applied additional upward pressure. The Bank of England voted 7-2 to leave government bond purchases unchanged and said, “Some developments during the intervening period appear to have strengthened [the case for modest tightening over the forecast horizon], although considerable uncertainties remain.” While “the pace of recovery of global activity has showed signs of slowing” amid Delta’s spread, “global inflationary pressures have remained strong and there are some signs that cost pressures may prove more persistent” as a result of “robust goods demand and continuing supply constraints.” The U.K.’s 2-year yield jumped 8.2 bps higher and the British Pound rallied sharply. The 6.0-bp increase for the 10-year yield doubled moves elsewhere in the region. Stocks mostly climbed in Asia and were higher across mainland Europe. Despite larger-than-expected declines in German and French PMI surveys for September, those countries’ stock indexes were 0.7% higher. Just prior to the release of the U.S. jobless claims data, the 2-year Treasury yield was 1.0 bps higher at 0.25%, a ten-week high, and the 10-year yield had risen 4.4 bps to 1.35%. U.S. equity index futures were up 0.6%. The surprise rise in state-program jobless claims failed to dislodge stocks or yields from those levels.