A Somnolent Summer Drift?

You might be inclined to suggest the holiday-shortened week is destined to be an uneventful, somnolent summer drift.

And if you are so inclined, you may be right.

But the calendar, sparse as it is, does at least have the potential to move markets. ISM services is on deck Tuesday, and in addition to fresh anecdotes documenting the impact and prevalence of price pressures, anyone masochistic enough not to be on vacation will also look to the employment gauge for incremental evidence that labor market frictions are abating (or, perhaps more aptly, not abating).

The next day, we’ll get JOLTS (for May) and the June FOMC minutes.

All of this will be contextualized via June payrolls, which offered something for everyone. The headline print was solid enough to allay concerns surrounding disappointments in April and May, but not so hot as to alter anyone’s perception of the Fed’s tightening timeline. Indeed, the uptick in the unemployment rate combined with the (still massive) shortfall in the labor market (versus pre-pandemic levels of employment) is cover for a Committee struggling to avoid the perception that the timeline on tapering (and, ultimately, liftoff) will need to be accelerated.

Read more:

‘Just’ 6.8 Million To Go!

‘Numbers!’ Under The Hood Of The June Jobs Report

For once, the meeting minutes won’t be stale. I mean, they’re always stale by definition, but market participants are still (very) keen to hear more about the deliberations given the shift in the dots and also considering it was, as Powell put it, “the talking about talking about it” meeting.

“The discussion didn’t have the benefit of the June employment report, although it will nonetheless be useful to learn how participants are characterizing the improved jobs market and reports of labor shortages in certain sectors,” BMO’s Ian Lyngen and Ben Jeffery said, adding that “any insights on the trends in consumer prices will undoubtedly garner attention with the path toward a flatter curve in the event of a less-dovish skew well established at this point.”

To the extent to minutes do help traders refine their assessment of the Fed’s reaction function, it’ll be against a backdrop of a bond market that’s rallied and a curve that’s flattened (figure below).

The long-end is richer by ~15bps since the June meeting.

“Markets are lulled into complacency that monetary policy will remain accommodative, despite a hawkish pivot from the Fed,” SocGen’s Subadra Rajappa remarked, adding that in the bank’s view, “earlier or faster tapering of asset purchases is an under-priced risk.”

TD’s Priya Misra, on the other hand, wrote Friday that she doesn’t “think the Fed is under pressure to taper or hike soon, and thus the pricing in of a ‘policy mistake’ seems a bit far-fetched.”

For Misra, the post-FOMC price action was “a function of position capitulation,” while the “policy mistake” color could be seen, in hindsight, as “a case of finding a narrative to fit price action.” For what it’s worth, those two aren’t mutually exclusive. Positioning washouts can create false optics (in this case a “growth scare” via curve flattening) which can then become self-fulfilling.

“We think that the Fed needs to clarify its thresholds for the exit, and we could get a sign from the release of the Fed minutes and Chair Powell’s Humphrey Hawkins testimony likely in mid-July,” Misra went on to say.

Meanwhile, the debt ceiling is topical again. It’s the usual song and dance and I’m frankly reluctant to dignify it — it’s stupidity squared. Or even cubed.

The US government doesn’t need to borrow to spend in the first place, and Treasurys aren’t “debt,” they’re just interest-bearing dollars. We spend each and every weekday being slaves to instruments and concepts of our own creation without ever once stopping to laugh at ourselves. That’s bad enough on its own. Debt ceiling brinksmanship amounts to US lawmakers threatening to deliberately bring about financial armageddon by chancing a technical default on interest-bearing versions of a currency that they (lawmakers) can conjure at will. It’s too stupid to be true. But then again, so is almost everything these days.