Market participants will spend the week talking about inflation and COVID.
That means this week will be the same as every other week.
But over the next several days, the debate promises to be especially animated. CPI is due Wednesday in the US, where price pressures abated last month. Or at least according to economists’ forecasts. Consensus is looking for a sharp deceleration on both the headline and core prints (figure below).
Generally speaking, the Fed is running short on plausible deniability when it comes to putting off a taper announcement.
The July NFP report was robust. Although some officials are keen to see more progress on the jobs front, especially considering the persistence of various “frictions” and expectations that the spread of the Delta variant may prolong labor supply constraints, staying “patient” and unveiling a timeline for paring monthly asset purchases aren’t mutually exclusive. Consider that even a policy conjuncture which found the Fed hiking rates twice by 25bps and maintaining the size of the balance sheet at current levels would still count as ultra accommodative. And we’re years away from such a conjuncture.
Sadly, the Fed can’t actually achieve the goal implicit in the tweaked version of its labor market mandate. Monetary policy can’t create equality of opportunity for women and minorities. That’s the purview of Congress, fiscal policy and corporate diversity initiatives. At the risk of coming across as unduly fatalistic, once the unemployment rate gets back to pre-crisis levels, there won’t be any appetite among a predominately white, wealthy panel of technocrats for chancing an inflation spiral in the interest of advancing the economic interests of African Americans. Even if you could make the case that monetary policy were capable of such things, these just aren’t the folks for the job — decent people though they mostly are.
Given anecdotes from PMIs, it certainly wouldn’t be surprising if inflation overshot estimates again. If it does, critics will scream from the rooftops about the perils of Fed largesse. Note that Joe Manchin has now inserted himself into the debate. “I urge you and the other members of the Federal Open Market Committee to immediately reassess our nation’s stance of monetary policy and begin to taper your emergency stimulus response,” Manchin said, in a letter to Jerome Powell last week. I hoped we’d hit “peak Manchin” months ago. It’s clear we haven’t.
If you like charts illustrating the acute disconnect between labor supply and demand, June JOLTS (due Monday) promises plenty of eye candy. The figure (below) is where things stood at the end of May.
Also on deck in the new week: PPI, NFIB, the preliminary read on University of Michigan sentiment for August and supply (3s, 10s and 30s).
“The post-NFP backup in yields [was] as much an auction concession as it [was] any skew to the Fed,” BMO’s Ian Lyngen and Ben Jeffery said, of the bear steepening that followed July payrolls. “The fact 10s and 30s led the downtrade is consistent with this interpretation and should introduce appeal for the new bonds,” they added. “Had the selloff been primarily a function of policy expectations, one would have seen 5s as the decided underperformer.”
Bloomberg’s Alyce Andres echoed that. “It was widely believed [the] price action reflect[ed] some supply set up for $41 billion in new 10-year notes and $27 billion in new bonds on Wednesday and Thursday, respectively,” Andres remarked.
At the same time, traders (those who aren’t on vacation) will be watching pandemic developments stateside, where the seven-day average of new virus cases is back above 100,000 (figure below).
The situation in Texas and Florida is dire.
There are just six ICU beds available in the Austin trauma service area, according to official data. Dr. Desmar Walkes of the Austin-Travis County Health Authority issued an alarming press release over the weekend. “Our hospitals are severely stressed and there is little we can do to alleviate their burden with the surging cases,” Walkes said. “The public has to act now and help or we will face a catastrophe in our community that could have been avoided. The situation is critical.”
The situation is similarly “critical” in Florida, where Ron DeSantis is gambling both his political future and the lives of Floridians on an almost pathologically obstinate approach to surging cases.
“If the latest surge overwhelms hospitals, leaving doctors and nurses unable to properly care for the younger, almost entirely unvaccinated people packing emergency rooms and intensive care units, DeSantis’s perch as a Republican Party front-runner with higher aspirations could be in serious trouble,” The New York Times wrote Sunday, summing things up. “If, however, Florida comes through another virus peak with both its hospital system and economy intact, DeSantis’s game of chicken with the deadly pandemic could become a model for how to coexist with a virus that is unlikely to ever fully vanish.”
Forgetting the lunacy inherent in spurning even the simplest, least intrusive containment measures purely out of spite, DeSantis’s approach (to the extent it is, in fact, part of an ongoing effort to set the stage for a 2024 run) is also perilous for assuming Trump won’t be running. In a new piece surveying the field, Politico noted that “if he decided to run again in a crowded 2024 primary field, [Trump] would get roughly half of the vote, with DeSantis in a distant second place at 19%.” So, if the virus doesn’t kill DeSantis’s highest political ambitions, Trump might. Simply by running.
In any event, the tragedy in states where the virus is spreading virtually unchecked is that people have to actually start dying before recalcitrant governors will relent. That seems ludicrous. But, it’s like the great man said: “Give me the liberty to go to a bar mask-less and unvaccinated against deadly, viral pneumonia, or give me death. By deadly, viral pneumonia.”
DeSantis won the governorship in 2018 by less than 33,000 votes. It would be hard to believe that there haven’t been at least that many Republican voters killed or hospitalized by the virus and rethinking their choice of a pro-covid governor.
Jay Powell signaled his equality bona fides by relaying an account of his daily commute past growing throngs of unhoused people. It would have been much more reassuring, at least to me, if he had had a little more courage beyond the patently obvious. That would mean not merely reporting what his retinas are processing, but actually delivering THIS sort of truth bomb:
“[O]nce the unemployment rate gets back to pre-crisis levels, there won’t be any appetite among a predominately white, wealthy panel of technocrats for chancing an inflation spiral in the interest of advancing the economic interests of African Americans.”