In addition to the first look at second quarter GDP, which will betray the most spectacular collapse in activity the world’s largest economy has witnessed in at least 100 years, market participants will be treated to a fresh “update” from the Fed in the coming days.
Recent events have likely offset in the minds of policymakers.
For example, the last two jobs reports were blockbusters, even as i) structural damage is piling up as permanent job losses rise, and ii) the gains are uneven as the gap between white and African American unemployment widens.
Retail sales staged a true “V-shaped” recovery, but consumer spending is now jeopardized by ambiguity around the future of federal assistance for the unemployed. Manufacturing activity has rebounded smartly, but there’s evidence that the services sector is already under pressure from the reimposition of virus containment protocols in states representing ~75% of the US population.
And, of course, jobless claims are rising again, in what many believe is the most ominous harbinger of them all. This week’s figures will be watched especially closely as they’ll be set against fraught negotiations inside the Beltway.
Ultimately, the evidence on the economy is best described as “mixed”.
Fed messaging since the last meeting has hewed closely to a cautious narrative that emphasizes the risk of structural damage from permanent business closures and the importance of safeguarding public health.
Anecdotal and quantitative evidence suggests that more businesses are closing their doors permanently in the wake of new lockdowns in hotspot states.
And yet, financial assets are buoyant. Unprecedented support from the Fed and its counterparts globally has engineered a “V-shaped” recovery in equities and credit.
You could have slept through the first seven months of the year and you’d never know anything happened judging by many assets.
Borrowing costs for investment grade companies are at record lows and management teams have taken advantage by tapping the primary market for a record haul. Inflows into credit funds show market participants are enthusiastic about investing alongside Jerome Powell.
The Fed is clearly cognizant of the extent to which the disconnect between the “fundamentals” (both macro and micro) and asset prices is being lampooned by market participants and lamented by critics and the media.
Wall Street’s traders and investment bankers are coming off a blockbuster quarter during which tens of billions in trading revenue and underwriting fees were set against ~$33 billion in provisions for loan losses.
That represents a stark juxtaposition which underscores the notion that there are “two Americas”.
(Read the full story: "Bonanza: Wall Street-Main Street Divide Laid Bare During US Economy’s Worst-Ever Quarter")
Were the Fed to get any more specific/explicit in terms of forward guidance, they would risk exacerbating this disconnect.
“The Fed meeting will function as a monetary policy placeholder with the more impactful changes not slated until later in the year”, BMO’s rates team said Friday. “Explicit hard-target forward guidance will undoubtedly be offered by the FOMC before yearend; although it’s increasingly looking like a September or December rollout”, they added, noting that “the same holds true for policymakers’ new framework, which in terms of sequencing logically occurs in advance of or in concert with the new targets”.
Others generally agree. “Vague [forward] guidance is ok for now, with inflation running below 1.0% YoY and the unemployment rate well above full employment measures”, SocGen’s Stephen Gallagher wrote Friday, before noting that,
As the economy gains, however, the Fed will need to be more specific in order to avoid premature rate hike expectations. As this is not yet a problem, the Fed still has time to plan its strategy. We anticipate a stronger forward guidance plan later this year with a tie to average inflation rates. By committing to keeping rates low for a longer period of time, and flattening anticipated rate hike paths, the Fed can influence long-term yields.
Minutes from the June meeting suggested the Fed is nowhere close to ready when it comes to launching yield-curve control, although the “study” phase is ongoing. Powell will likely reiterate that some form of YCC is an option, but emphasize that officials are still weighing the pros and cons.
The (now set) monthly pace of QE means coupon issuance will outstrip Fed buying in the back half of the year, but given the challenging economic backdrop, it’s difficult to see yields taking off anytime soon.
Most obviously, nothing in recent Fedspeak (and there’s been a ton of it) suggests anything game-changing or even incremental is in the cards at the July meeting. “We suspect if there was a need to introduce forward guidance, expanded corporate purchases, or YCC the market would have heard about it by now”, BMO remarked.
What we have heard from the Fed, though, are exhortations for additional fiscal stimulus. While current officials have avoided overtly prescriptive tones when it comes to calling for more spending to support the recovery, former officials have been more explicit.
Janet Yellen and Ben Bernanke, for example, made a series of suggestions in a lengthy article earlier this month. “Following our advice would further increase the already record-level federal budget deficit”, they wrote, adding that “with interest rates extremely low and likely to remain so for some time, we do not believe that concerns about the deficit and debt should prevent Congress from responding robustly to this emergency”.
One imagines a bargain on the next virus relief package will still be elusive by the time Powell speaks at the post-FOMC press conference on Wednesday, so you can be sure he’ll be asked to weigh in.
It’s important to be judicious when it comes to discussing all of the above. The fact is, the vast majority of those who purport to be interested in serious debate aren’t — serious or interested, that is.
The narrative adopted by many market participants and “name brand” investors is that the Fed has done (far) too much, overstepping its legal authority in the process. Ask those same people whether it makes sense for Congress to shoulder some of the burden, the answer is usually that the deficit is too large and we’re being fiscally irresponsible.
In other words, they’ve got plenty of criticism to offer, but no solutions. Which is typical.
What’s been proven over the past 3 months is that MMT with UBI (directing funs into the real economy via personal consumption) creates economic growth and positive inflation. The previous version of MMT (aka wealth fare for the wealthy) creates deflation and over the long run economic destruction.
One thought that is worth pushing back on is the GDP report. There is scope for upside surprise IMHO. Note the large discrepancy between the NY Fed and the Atlanta Fed number. One issue that gets missed a lot is the amount of hiring that can be proxied by the different between sum of initial claims and continuing claims which also has relevance for the payroll report which might also surprise on the upside. Interestingly this hiring proxy is not yet showing a slowing in the newly virus effected sunbelt states and of course it is strong in the North East. Having said all that it seems obvious that the US economic momentum, aka CESIUSD, has peaked and is set to normalize, just to add some further confusion to the issue.
Retail sales will be negatively impacted by the end of the four month long Federal eviction moratorium.
According to the Washington Post, 20% of the 110 million renters in the USA will face eviction by September 30.
Ask those same people whether it makes sense for Congress to shoulder some of the burden, the answer is usually that the deficit is too large and we’re being fiscally irresponsible.
In other words, they’ve got plenty of criticism to offer, but no solutions. Which is typical.
Well many of those same people & other “little people” have been warning for years about the need to raise taxes and cut spending (reform entitlements). Had we done so the present fiscal mess might not be so rediculous.
Prepare for MMT (or more of it) and expect many of the same eggheads at the FED and parasites in Congress to address the issue.