Cautious Bulls. Stocks traded lower once again yesterday as investors planned for a possible Fed taper announcement at the next FOMC meeting, just 12 days away. Weekly jobless claims hit a pandemic era low, fanning the flames for a hawkish Fed move.
N O T E W O R T H Y
“The lady isn’t tapering” quipped ECB Chief Christine Lagarde, in a press speech. She is, after all, the most powerful woman in international finance these days, so it is the lady’s prerogative. It is an interesting use of words and bears some historical, and somewhat relevant context. Lagarde was most likely paying homage to former Prime Minister Margaret Thatcher, who famously declared “the lady’s not for turning.” She used the line in a speech to declare to her Conservative Party that she was unwilling to drop her agenda to pull back regulations. The European Central Bank (ECB) has its own form of bond buying called PEPP (Pandemic Emergency Purchase Programme). The EU program, er programme, is similar to US QE process at a high level. PEPP’s aims is to provide liquidity and keep yields and borrowing costs low. One of the differences is that while the US QE has a set monthly target of $150 billion, PEPP is somewhat variable. Wouldn’t you know it, despite the colorful (and commendable) use of the lady tagline, the ECB is actually adjusting its purchases downward. Seems like a case of semantics, but nonetheless the move adds fuel to those FOMC members who would like to start tapering ASAP. Oh, and Lagarde also assured listeners that rate hikes are far in the future and that despite the adjustment, the ECB will remain quite accommodative.
That should sound familiar. That is likely why stocks were under pressure yesterday, as traders eyed the Lagarde speech. Additionally, the Department of Labor announced that weekly jobless claims for the week ending September 4 were 310K which was better than expected and a post-COVID-lockdown low. Similarly Continuing Jobless Claims hit its pandemic-era low of 2.783 million. Those somewhat positive readings were viewed in a “good is bad” light as it is likely to add to the hawks’ case for immediate tapering. As with all things in the capital markets, nothing is cut and dry, however. It is clear the Fed is concerned with the recent Delta variant surge based on speeches by both the taper hawks and doves. Just looking at the raw numbers, the surge is definitely upon us and has been since late July. With this current surge, the fear is less about a 2020-style lockdown and more about the direct impact on businesses. Beyond the raw numbers, many companies have been blaming slower growth on the Delta variant, and the complaints are not likely to escape the Fed’s ear. For: economy is strengthening, inflation continues to spike, and labor and supply issues will clear up soon. Against: we are still in the midst of a pandemic, many recent economic numbers have been weak (Consumer Confidence, PMIs, Monthly Employment), companies are feeling a pinch from the Delta variant, fear of pushing the economy back into a contraction, and inflation is transient. So, as you can see there are solid arguments for tapering now, as there are for tapering later. The past few days have shown that traders are betting on a near term taper, though that could change at any time. It is also important to note that according to Fed Funds Futures, the market appears to be targeting December 2022 for a likely hike. We will get some inflation numbers today and Tuesday and the Fed will likely be monitoring those closely. We would be wise to do the same.
Stock pulled back yesterday on taper fears in response to a strong employment figure and an ECB adjustment. The S&P500 slid by -0.46%, the Dow Jones Industrial Average fell by -0.43%, the Nasdaq Composite gave up -0.25%, and the Russell 2000 Index nudged down by -0.03%. Bonds climbed and 10-year treasury yields gave up -4 basis points to 1.29%. Cryptos inched up by +0.35% and Bitcoin added +0.43%.
– PPI Year over Year (August) is expected to be +8.2%, higher than last month’s reported +7.8%.
– The Fed’s Mester and the ECB’s Rehn will both speak today.
– Next week we will get Consumer Price Index, Industrial Production, Retail Sales, some regional Fed reports, and University of Michigan Survey. Check back in on Monday for calendars and details.
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