Traders and investors came into the new week staring down a formidable slate of data — plus a Fed meeting.
Jerome Powell and friends will doubtlessly leave their main policy levers unchanged, even as they acknowledge a steady improvement in the economy consistent with the idea that the US is at an “inflection point.” Slack in the labor market and allusions to the transitory nature of any inflation spikes will provide more than enough cover to ensure the statement and Powell’s general message in the press conference remain overtly accommodative.
“In the week ahead, investors will not want for fundamental and monetary policy inputs as the trading agenda is defined,” BMO’s Ian Lyngen and Ben Jeffery said. They see “little incentive for a shift in the prevailing policy stance” and note that while “there remains chatter about the timing of an official start to the tapering conversation, it’s too soon to expect any such foray given the consensus view that $120 billion in monthly purchases will remain in place until Q1 2022.”
As a reminder: You’d know about it if a taper announcement were any semblance of imminent. You’d also know about it if Powell planned to hint that the taper discussion was poised to commence. It’s no longer good enough to telegraph a policy shift months in advance. Now, policymakers are expected to telegraph the mere commencement of discussions about such shifts, too.
At the same time, the pause in the bond selloff means WAM extension and Operation Twist are off the table — at least until the next tantrum. The red dot (figure below) shows the Q1 selloff in Treasurys rivaled previous tantrum episodes. The green dot is indicative of the April reversal.
“We believe that the bar for the Fed to push back against the rise in rates (via a WAM extension, for example) is very high, and we do not view the recent change to the QE purchase calendar as being a true WAM extension,” TD’s Priya Misra remarked, adding that TD has pulled forward their forecast for a tapering announcement to March of next year and commencement the following month. “QE tapering is likely to be gradual and we expect it to end in January 2023,” she went on to say.
“A technical adjustment to administered rates is likely as the cash glut weighs on money market rates,” SocGen wrote. “With 10-year yields at the low end of the recent range, we see risks skewed towards higher yields on strong data.”
Following the Fed meeting, the market will get the first read on Q1 GDP. Consensus is looking for a near 7% pace of expansion.
Obviously, recent data has been robust, with stimulus bolstering spending in January and March (figure below), while the lifting of some COVID restrictions has helped employers rehire services sector workers lost to the virus.
Nevertheless, the economy was 8.4 million jobs short of pre-pandemic employment levels as of March’s nonfarm payrolls report. April’s jobs report, due May 7, is expected to show nearly 1 million jobs were added over the most recent survey period. Jobless claims hit a new pandemic-era low last week.
Also on the docket this week: Durables, consumer confidence and housing numbers, not to mention Joe Biden’s first address to a joint session of Congress.
In addition to the standard Republican rebuttal, Biden will apparently get a “review” (so to speak) from Progressives. Rep. Jamaal Bowman, who will deliver the remarks, called it “a balancing act.”
“He’s already done a lot that I love. And he’s going to say a lot of things that I like,” Bowman told NBC. “But if we relent, it doesn’t mean that what’s been going on so far is going to continue. It’s important for us as progressives to continue to push and continue to organize.”
America’s political duopoly is showing real signs of strain. Progressives have one bonafide celebrity (Ocasio-Cortez) and an expanding list of pseudo-stars. Societal momentum is clearly moving in the direction of Progressive causes and corporate America seems increasingly keen to adopt them because, after all, trends are often synonymous with profits.
Meanwhile, there is seemingly no place (at all) for traditional Republicans in government anymore. Repudiating Trumpism is a non-starter for a GOP which, frankly, would be almost unrecognizable to Ronald Reagan. Stalwarts like Liz Cheney have discovered that disavowing Trump is something of a political death knell. The Republican establishment is endangered. There’s no more poignant evidence of that than the party’s refusal to eject Marjorie Taylor Greene.
It’s not difficult (at all) to envision a future where America is, for the most part, governed by establishment Democrats, who find themselves perpetually besieged by, on one side, demands for an acceleration in the pace of societal modernization and, on the other, ethnonationalists.
Talk about “inflection points.”
I see more of a pendulum swing than a long term direction going forward. I voted for Biden realizing the corner Trump painted US into.. Past experience tells me people only see what they want to see along pretty ideological lines in these scenarios ( like Today ). Give me Campaign finance and a viable Third Party and I’ll bet on a better more competitive viable outcome for the Planet as a whole. Divisiveness is near all time highs , still…
I get what you’re saying but see it differently. Really, in the past forty years, the pendulum has been touched each period, held, ever so slightly, then let go. Gradually, over years, change occurred (mostly accruing benefits to certain factions) but was almost imperceptible to the untrained eye. Until, well, until the last few years where it’s obvious that the pendulum was knocked off equilibrium and no one can agree how it happened and when.
I, too, was of the opinion that campaign finance reform and a third-party was part of the solution. We’re past campaign finance reform and past a third-party. (Who even talks about Citizens United any longer…wouldn’t this have been an obvious place to start?) Those are solutions that, if they were going to happen, would have happened years if not decades ago.
We are in a hinge-y period, a period where we are going to have to invent new solutions, a new monetary system, a new global order, and new industries that create wealth and, hopefully, employee at least some of the millions who were cast off this last year. There is no going back in time. (Obviously, I’m in the modernization camp.)
Let us hope these future solutions create a renewal of purpose, cast aside our current, hollow institutions, and give us an opportunity to move forward. Not everyone has to embrace the new institutions, only enough of us do. Let’s hope it doesn’t take a catastrophe to unite us.
Oligarchy and a heavily financialized economy based on mass consumption and the burnng of fossil fuels is a dead end — or, more existentially, death. Time for a Green New Deal.
One thought that I have which may or not be a consensus view is that the Fed is scared to death to talk about talking about a taper, do give advanced warning of it, to articulate a schedule for it given that too much guidance in 2018 taught them a lesson that there is a thing as too much transparency. So here is what they may do instead. QE tapering is the new rate hike. They won’t pre-announce. They will come to a meeting and decide at that meeting one of three things–taper, do nothing, or resume QE for that next 6-weeks and then they will adjust at each meeting. So there is no need to pre-announce. Best guess is they will dip their toe in Sept, but it could be later as they are going to want a lot of clarity on just how transitory inflation is against a backdrop of a highly uncertain macro backdrop which is an oversused phrase but really is the case give the shock and policy response was of such magnitude that there is no real playbook here.