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Market Update

Fed officials talk taper timeline; community banks and credit unions see Q3 loan growth

November 22, 2021
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    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


In an eventful week for market participants, the major U.S. equity indices ended the week mixed with the S&P 500 and Nasdaq Composite indices each setting new all-time highs during the week. Treasury yields declined modestly as investors digested largely positive economic data and earnings releases, mixed comments from Federal Reserve officials, and the signing of the bipartisan infrastructure bill into law.

Economic data

  • Manufacturing sector updates were the focus of this week’s economic calendar, namely the Empire Manufacturing Index and the Philadelphia Fed Business Outlook Survey.
  • Monday’s release of the Empire Manufacturing Index showed business conditions improving in November as the Index increased to 30.9, topping all estimates, compared to the 19.8 reading seen a month ago.
    • The major themes continued uninterrupted — fragile supply chains struggle to keep pace with robust consumer demand.
    • New orders topped October’s level while both the prices paid component and the prices received component advanced notably with the prices paid reading increasing to the second-highest level on record as manufacturers look to pass off the rise in raw materials prices to consumers.
    • While the majority of the report pointed to improving business conditions, the forward-looking section of the survey saw business conditions declining in the next six months.
  • The Philadelphia Fed Business Outlook Survey reported a strong 39.0 reading, far above both the consensus estimate and the October reading.
    • Much like its New York-based counterpart, business conditions improved, and new orders increased, while both the prices paid for materials and the prices received on the finished product increased notably month over month with the prices received component touching levels not seen in almost 50 years.
    • Supply chain stressors were top of mind as delivery times continued to deteriorate and unfilled orders lurched higher.
  • With two prominent regional manufacturing surveys performing well above expectations, all eyes will turn to the national ISM Manufacturing Index, released on December 1, to see if activity on the east coast is consistent with the conditions seen elsewhere in the country.
  • Retail sales also garnered significant attention from market participants last week.
    • While rising price levels have caused some consternation among consumers, consumer demand appears to remain intact as the October retail sales figure topped estimates to increase 1.7% over the month, the measure’s third consecutive monthly increase.
    • Of the 13 categories measured, 11 categories saw month-over-month increases in spending levels.
    • In a nod to rising energy prices, the value of gas station sales jumped 3.9% in October.

        Fed officials talk taper timeline

        • At the last monetary policy meeting, the FOMC announced that its then-current $120 billion per month asset purchase program would be reduced by $15 billion in November and $15 billion in December with the expectation that a similar monthly pace would be appropriate in 2022.
        • This week, several Federal Reserve officials commented on the expected timeline with diverging opinions emerging.
        • Vice-Chair of the Federal Reserve Richard Clarida turned heads when he suggested that a quicker pace may be needed given the current environment of strong economic growth and rising price levels.
          • Christopher Waller, a member of the Fed Board of Governors, expressed similar sentiment arguing that rising inflation and a rapidly improving labor market “pushed me toward favoring a faster pace of tapering and a more rapid removal of accommodation in 2022.”
        • On the opposite end of the spectrum, Minneapolis Fed President Neel Kashkari argued in favor of the current pace of asset purchase reductions saying that the Fed should not overact to the headline inflation data as the factors contributing to the rise in price levels will likely prove transitory and that changing the course of monetary policy to deal with temporary dislocations “could lead to a worse long-term outcome for the economy.”

            Capitol Hill

            • There was a lot of activity on Capitol Hill last week as President Joe Biden signed the $1 trillion bipartisan infrastructure bill into law on Monday.
              • Infrastructure legislation has been notoriously difficult to pass in recent memory and this law will attempt to repair the nation’s aging transportation networks and broadband infrastructure.
              • While the bill is now signed into law, many analysts expect months to years before major projects are launched.
            • After weeks of negotiations and missed deadlines, the House of Representatives passed the $1.75 trillion social infrastructure bill, titled the Build Back Better Act, which looks to expand the social safety net significantly.
              • Specifically, the bill provides for universal pre-K, a year of expanded Child Tax Credits, an expansion of Medicare, and $500 billion in clean energy tax credits.
            • The bill will now head to the Senate where moderate Democrats Joe Manchin of West Virginia and Kyrsten Sinema of Arizona hold substantial negotiating leverage as Democrats cannot afford to lose a single Democrat senator vote in the face of united Republican opposition.
            • Senate Majority Leader Chuck Schumer says he aims to pass the bill before Christmas.

            Interest rates

            • Treasury yields across the curve ended the week flat to down modestly.
            • After the 10-year Treasury yield rose as high as 1.63% by mid-week, the 10-year yield fell substantially in the back half of the week to end at 1.54%, four basis points lower than the previous Friday’s close.
              • Inflation expectations popped after the week prior’s Consumer Price Index (CPI) release but have since declined with the 10-year breakeven inflation rate sitting at 2.61%, below the levels seen just before the CPI release.
            • The curve looks marginally flatter on a week-over-week basis with the 2s/10s spread falling approximately one basis point to 1.04%.
            • While several Federal Reserve officials held speaking engagements last week and some suggested that a faster pace of asset purchase reductions may be warranted, the market’s expectation for Fed rate hikes remained roughly unchanged with the first hike expected in July 2022 and a second hike expected in the November – December 2022 timeframe.
            • Looking at current levels, the relative compensation for executing a 3-year receive-fixed Fed Funds swap remains unchanged on a week-over-week basis at 78 basis points, or approximately three rate hikes (assuming a 25 bps move per rate hike).

                Community banks and credit unions see loan growth in Q3

                • Community Banks and Credit Unions alike have seen loan growth accelerate in the third quarter.
                  • According to S&P Capital IQ, median loan growth, excluding PPP, increased 2.1% in the third quarter for banks under $10 billion in total assets.
                  • Commercial Real Estate loans (CRE) in particular are on the rise as the community bank segment reported a median 1.4% increase in CRE loans in the third quarter.
                  • Looking at the Credit Union (CU) space, CUs reported a median 2.4% quarter-over-quarter increase in total loans, the largest increase since 2018.

                        The look forward

                        Upcoming economic data releases

                        • Chicago Fed National Activity Index – Monday
                        • Existing Home Sales – Monday
                        • Markit US Manufacturing/Services PMI – Tuesday
                        • Richmond Fed Manufacturing Index – Tuesday
                        • FOMC Meeting Minutes - Wednesday
                        • Jobless Claims – Wednesday
                        • Wholesale Inventories – Wednesday
                        • Second estimate of Q3 GDP – Wednesday
                        • Durable Goods Orders – Wednesday
                        • Personal Spending - Friday

                            Upcoming Federal Reserve Speakers

                            • There will be no Federal Reserve speakers this week.

                              Rates snapshot

                              Market implied policy path (Overnight indexed swap rates)

                              Source: Chatham Financial

                              About the author

                              • Bill Smith

                                Associate Director
                                Balance Sheet Risk Management

                                Financial Institutions | Kennett Square, PA


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