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Market Update

FOMC announces tapering timeline

Date:
November 8, 2021
  • william smith headshot

    Authors

    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA

Summary

The major U.S. equity indices pushed higher, setting new all-time highs during the week. Treasury yields across the curve continued to retreat from recent highs as upbeat economic data releases, a rather dovish FOMC monetary policy meeting, and generally positive third-quarter corporate earnings releases dominated both headlines and investors’ attention.

Economic data

  • Economic data releases were in plentiful supply last week with Friday’s release of the October non-farm payroll report garnering the most attention from market participants.
    • According to the Labor Department, the U.S. economy added 531,000 jobs in October, far surpassing the consensus estimate and the mediocre September reading.
    • Leisure and hospitality positions posted the greatest job gains in October at 164,000 additions, while factory employment increased by 60,000 jobs, the most since June 2020.
    • Total job additions for August and September were revised higher by a net 235,000 jobs.
    • The unemployment rate declined 0.2% in October to 4.6%, while average hourly earnings increased 0.4%, in line with consensus expectations.
  • After mixed readings from the regional manufacturing indices in recent weeks, the national ISM Manufacturing Index fell to 60.8 in October as supply chain disruptions and rising prices abound.
    • According to the report, both new orders and production declined in October, while the prices paid component rose above its six-month moving average and sits just below the record level seen in June.
    • The ISM Services Index rose substantially in October to its highest level on record as delta variant fears faded and consumption picked up.
      • Unlike its manufacturing counterpart, the ISM Services Index reported a record level of new orders in October, but supply chain disruptions and rising prices comprised much of the commentary included in the report and seconds the sentiment found in the manufacturing report earlier in the week.

    FOMC meeting

    • In one of the most high-profile FOMC meetings in recent memory, Chair Powell and the FOMC announced the launch of the highly anticipated asset purchase reduction program.
      • According to the statement released following the conclusion of the two-day monetary policy meeting, the FOMC will reduce the current $120 billion per month asset purchase program by $15 billion per month, $10 billion in Treasuries, and $5 billion in mortgage-backed-securities, beginning “later this month.”
      • In a move that offers the FOMC flexibility, the $15 billion in reductions were only outlined for November and December but the statement noted that, “The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.”
      • Assuming a constant $15 billion reduction per month, the FOMC would be finished reducing the monthly asset purchases by June 2022.
      • The FOMC emphasized the absence of a link between the tapering of the asset purchase program and the onset of a rate hiking cycle with Chair Powell stating that committee members, “don’t think it’s time yet to raise interest rates.”
    • While the FOMC reiterated their belief that the recent pick-up in wholesale and consumer prices will be short-lived as COVID-19-related supply and demand imbalances resolve, the committee modified the latest statement slightly to read that price increases are “expected to be transitory.”
      • The tweaking of the statement, stating that price increases are “expected to be transitory” rather than simply “transitory”, turned some heads as investors pondered whether the FOMC is having second thoughts regarding the permanence of this year’s price increases.
    • Finally, as expected, the FOMC left the target range unchanged at 0%– 0.25%.

    Capitol Hill

    • After months long negotiations and slow rolling the passage of the $1.2 trillion bipartisan infrastructure bill, the House of Representatives passed the Infrastructure Investment and Jobs Act by a vote of 228-206 late Friday evening.
      • The bill adds roughly $550 billion in new spending with $110 billion for roads, bridges, and other large-scale projects, $66 billion for rail, $39 billion for public transit, and $65 billion to expand broadband access.
      • The bill now heads to President Biden’s desk and is expected to be signed as early as next week.
    • The bill has been slow to move through the House of Representatives since the Senate passed the bill in August as the progressive wing of the Democratic party used their votes as leverage to negotiate the passing of a much larger $1.75 trillion social infrastructure bill.
      • The $1.75 trillion social infrastructure bill, titled the Build Back Better Act, was expected to pass on Friday, but last-minute objections from a half-dozen moderate Democrats soured the bill’s chances for passage last week.
      • The group of moderates expressed their support for the bill in a procedural vote held early Saturday morning but indicated that they will need to see an economic analysis from the Congressional Budget Office (CBO) on the bill’s impact on the federal deficit before giving the bill full support.
      • Imminent passage of the Build Back Better Act looks unlikely as Congress heads on recess next week and the CBO economic analysis will likely be unavailable for several days or weeks.

        Interest rates

        • Treasury yields across the curve pulled back from the recent highs seen in late October last week as the market’s expectation of Fed Funds rate hikes moved back following Wednesday’s monetary policy meeting.
          • The five-year Treasury yield dropped 14 basis points over the week to 1.04%.
            • While lower inflation expectations were partially to blame for the move lower, the expectation of a slower start to a rate-hiking cycle was the primary driver of the decline.
          • The first fully-priced-in Fed Funds rate hike moved back to September 2022 from July 2022 last week.
        • The declines seen across the curve resulted in a relatively unchanged curve shape as measured by the 2s/10s basis which declined less than a half basis point week over week.
        • Interest for locking in current levels, particularly in the three to five-year point, seemingly picked up on our trading desk in the back half of the week as yields continued to retreat from their recent highs.

        Big banks issue debt

        • Many of the largest U.S. financial institutions have been actively issuing debt in 2021.
          • According to S&P Capital IQ, Bank of America, Goldman Sachs, Morgan Stanley, and JPMorgan are the top four issuers by volume so far in 2021, surpassing some of the largest corporations like Verizon Communications, Apple, and Amazon.
          • The primary drivers of the robust issuance in 2021 appear to be linked to the record-setting M&A activity experienced this year, coupled with a reopening U.S. economy and the expectation for higher interest rates.
        • Through the end of October, Bank of America leads the pack with $39.25 billion in new issuance with Goldman Sachs following in a close second at $38.8 billion in new issuance.
          • October issuance was significantly elevated in historical context with Financials seeing a 221% pick-up in October issuance and overall issuance surging 56% from last October’s levels.

            The look forward

            Upcoming economic data releases

            • Producer Price Index – Tuesday
            • Consumer Price Index – Wednesday
            • Wholesale Inventories – Wednesday
            • Jobless Claims – Wednesday
            • Consumer sentiment – Friday

              Upcoming Federal Reserve Speakers

              • Powell, Clarida, Harker, Bowman, and Evans – Monday

              • Powell, Bullard, Daly, and Kashkari – Tuesday

              • Williams – Friday


                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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