Fed minutes turn heads

Prior week summary

The major U.S. equity indices ended the week mixed with the S&P 500 suffering its second consecutive weekly decline as weaker-than-expected economic data and fears of an earlier-than-expected end to the Federal Reserve’s asset purchase program dampened investor sentiment and outweighed optimism about the coming end of the COVID-19 pandemic and a resurgent U.S. economy. Treasury yields traded in a tight range for much of the week with the 10-year Treasury yield finishing the week roughly where it started at 1.63%. While the 10-year yield experienced only modest movements, the 10-year breakeven inflation rate plummeted over 10 basis points last week. After sitting north of 2.55% days after expectation-beating inflation readings, the 10-year breakeven inflation rate ended last week just under 2.45%. Although market participants have been largely optimistic about the prospects of a strong summer for a U.S. economy emerging from the pandemic, economic data releases in recent weeks have showcased the headwinds facing the U.S. economy and last week was no different. Manufacturing releases for the week painted a mixed picture. Monday’s release of the Empire Manufacturing Index showed the index falling to 24.3 in May but performing moderately better than the consensus estimate. Of note, the new orders segment rose to 28.9, the highest reading since 2006, while the prices paid measure surged to an all-time high, adding fuel to the already-hot inflation debate. The Philadelphia Fed Business Outlook Survey also cooled in May falling to 31.5 compared to the 50.2 reading seen in April and the 41.5 level expectation. Similar to the Empire Manufacturing Index reading, the inflation component showed prices rising to the highest level since 1980. In a bright spot, the Markit US Manufacturing PMI topped both last month’s reading and the consensus estimate rising to the highest reading in the series’ history as new orders led the charge and posted its eleventh consecutive month of readings in expansionary territory. In the housing sector, the data largely underwhelmed last week. Housing starts, building permits, and existing home sales all fell below both the respective last month’s reading and the consensus expectation. Finally, jobless claims continued to improve last week setting another pandemic-era low as 444,000 individuals filed for unemployment benefits for the week of May 15. On the contrary, continuing claims ticked higher to 3.75 million claims.

The Federal Reserve turned heads last week after releasing the minutes to the late April FOMC meeting. According to the minutes, “A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.” The Federal Reserve’s current pace of asset purchases sits at $120 billion per month with $80 billion of the purchases coming in the form of Treasuries and the remaining $40 billion in mortgage-backed securities. Notably, the minutes also indicated that many of the Federal Reserve officials continue to see the U.S. economy as far from their goals with the minutes reading, “Various participants noted that it would likely be some time until the economy had made substantial further progress toward the Committee’s maximum-employment and price-stability goals.” While talk of tapering discussions grabbed the attention of many market participants, analysts noted that the very weak April jobs report, released after the FOMC’s April meeting, likely pushes tapering discussions further down the road.

Senate Republicans and White House staff engaged in a second week of negotiations on the American Jobs Plan with little to show for their efforts last week. After Senate Republicans tabled a $568 billion counterproposal in late April, the White House made a counteroffer on Friday, bringing the cost of the proposed bill down from the original $2.3 trillion price tag to $1.7 trillion. According to the White House, the $600 billion in cost-cutting would result from shifting some areas of the proposed legislation out of the American Jobs Plan and into other pieces of legislation currently under debate in Congress, reducing funding for rural broadband, and cutting its proposal for “roads, bridges, and major infrastructure projects” by approximately $40 billion. Notably, many of the cuts that were offered stemmed from areas often described as “traditional infrastructure.” In a statement released with the counteroffer, President Biden indicated that he hoped the newest proposal would “spur further bipartisan cooperation and progress.” Republicans quickly threw cold water on those hopes on Friday with Senator Shelley Moore Capito, the lead Republican infrastructure negotiator, saying, “Based on today’s meeting, the groups seem further apart after two meetings with White House staff than they were after one meeting with President Biden,” and emphasized that the current proposal remains, “well above the range of what can pass Congress with bipartisan support.”

As the LIBOR sunset dates near closer, the Bloomberg Short-Term Yield Index (BSBY) has found itself increasingly in the headlines. Earlier in the month, JPMorgan and Bank of America announced that they executed the first BSBY swap, a one-year $250 million basis swap. Last week, the CME Group announced that they plan to support BSBY futures in the third quarter of this year. In a statement released with the announcement, the CME Group touted the efficiencies that would stem from a BSBY futures market saying that BSBY futures will provide, “a price discovery mechanism for building forward curves and hedging OTC swap risk,” and noted, “CME Clearing intends to support BSBY swap clearing in Q4 2021.”

The look forward

Market participants are gearing up for yet another busy week of economic data releases with updated figures on new home sales, the Conference Board Consumer Confidence Survey, durable goods orders, jobless claims, wholesale inventories, consumer spending, and the second estimate for first-quarter GDP all dotting the economic calendar. Several Federal Reserve members hold speaking engagements in the front half of the week.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)