The Week After

A relative paucity of data during the first half of the new week will leave traders and investors to parse Fed speak for direction.

Market participants will hear from a veritable procession of officials in the coming days, with Bullard, Williams, Mester, Daly, Bowman, Bostic and Rosengren all scheduled to speak during various engagements. Jerome Powell will chat Tuesday with the House subcommittee on the Fed’s crisis response.

The Fed’s message probably needs fine-tuning. The post-FOMC trade was chaotic. Markets questioned the viability of various reflation trades and the curve aggressively flattened. Jim Bullard managed to spark an equities selloff Friday with hawkish remarks on CNBC. It’s not clear, to me anyway, that there’s much (if any) utility in parading Fed officials on national television. They speak enough as it is.

TD’s Priya Misra had a measured take. “We believe the hawkish shift at the June FOMC meeting was more a function of the Fed’s risk management approach rather than a monumental shift in the reaction function,” she said, calling the market’s reaction to the June FOMC “extreme.”

“We don’t think that the move represents the start of a taper tantrum or that the market is collectively pricing in a policy mistake,” Misra wrote late last week. “Instead, we believe the Fed triggered an unwind of the reflation trade” as evidenced by the bull flattening impulse and the drop in breakevens (figure above).

The bank sees a taper announcement in December and rate hikes beginning a year later. It’s a process (figure below, from TD).

The dramatic narrowing in the 5s30s “represent[ed] a regime shift from the mid-March peak of 166bps and demonstrated a remarkable bid for duration in an environment where reflation was widely considered the primary risk for 2021,” BMO’s Ian Lyngen and Ben Jeffery remarked, adding that “the process of recalibrating investors’ understanding of the Fed’s willingness to respond to an uptick of inflation and an accelerating real economy is the type of shift that will continue to impact the direction of US rates for some time.”

After four straight days of Fed speak, traders will get personal income and spending data on Friday, along with the final read on University of Michigan sentiment. The former will provide a fresh take on realized inflation and the latter an update on consumer expectations in the back-half of the month. The preliminary read from the Michigan survey wasn’t exactly sanguine, even as things calmed down a bit from May (figure below).

Investors will also get a fresh read on the US housing market courtesy of existing home sales and new home sales. The housing debate is almost as heated as the market itself.

Recent data suggested things are cooling, if for no other reason than supply can’t keep up with demand. But you have to believe that prospective buyers are on the brink of getting priced totally out of the market.

“When people tell you there’s a ‘shortage’ of housing due to lack of supply and we need to build more, they’re perpetuating a lie,” SocGen’s Albert Edwards said, on social media. “There’s excess demand (especially speculative demand) due to central bank QE and ZIRP,” he added. “Unaffordable housing is due to central banks, not lack of supply.”

Prices have obviously surged and mortgage rates are still loitering near record lows. Lumber prices, meanwhile, have collapsed from their May 10 peak. The preceding run-up was nothing short of ridiculous.

A recent Bloomberg Op-Ed argued that Americans should just “become a nation of renters.” I’m not sure I’d call the piece persuasive, but it’s short and worth a read.

As for equities, it’ll be all about any follow-through from last week’s aggressive abandonment of reflation favorites. And remember, the door is open to a potentially wider distribution of daily outcomes, which is just a euphemistic way of suggesting that realized vol could move higher, especially if there’s a macro catalyst.