- FOMC not expected to announce QE tapering but may begin preliminary talks
- U.S. retail sales expected to stall after earlier surge on stimulus checks
- U.S. manufacturing production expected to show another strong increaseU.S.
- PPI expected to show another big increase
- U.S. homebuilder confidence expected steady
- 20-year T-note auction to yield near 2.11%
FOMC not expected to announce QE tapering but may begin preliminary talks — Fed officials in the past several weeks have been running what seems to be a planned PR campaign to warn the markets that discussions are likely to begin soon on when to taper QE. Therefore, the markets should not be surprised if the FOMC at its 2-day meeting that begins today starts to discuss when to announce QE tapering. Still, Fed Chair Powell, in his post-meeting press conference, is likely to downplay the timing of QE tapering and reassure that markets that QE tapering is not imminent.
At the last FOMC meeting on April 28-29, Fed Chair Powell said “it is not time yet” to start talking about tapering asset purchases. However, the minutes from that meeting, later released on May 19, said that “a number” of FOMC members suggested that discussions might have to begin at some point on QE tapering.
Even if preliminary QE tapering discussions begin this week, the markets generally do not expect an early warning of QE tapering until the Fed’s August Jackson Hole conference or the September 21-22 FOMC meeting, and a formal announcement sometime between September and December.
A survey taken by Bloomberg in early June found that only 16% of respondents expect the Fed’s early-warning to take place in June or July. The largest plurality of 40% believe that the Fed’s early-warning will come at the Fed’s Jackson Hole Conference in August. The second-highest percentage of 24% believe the early warning will come in September. Only 14% of respondents expect the early warning to come in October or later. Regarding the formal QE tapering announcement, 33% of the respondents expect the announcement in September, 10% in October or November, and 33% in December.
Aside from QE tapering, the markets are waiting to see whether the FOMC this week boosts its short-term administered rates to put a higher floor under short-term rates. The overnight federal funds rate has been trading at 0.06%, which is 6.5 bp below the midpoint of 0.125% of the Fed’s 0.00%/0.25% target range.
The recent Bloomberg survey also found that 71% of respondents expect the FOMC at its meeting this week to leave its interest on excess reserves rate (IOER) unchanged. However, 29% of the respondents are expecting the FOMC this week to raise the IOER rate by +5 bp to 0.15%. The markets are still not expecting the Fed’s first +25 bp hike in the federal funds rate until early 2023.
U.S. retail sales expected to stall after earlier surge on stimulus checks — The consensus is for a May retail sales report today of -0.7% m/m and +0.4% ex-autos m/m, following April’s report of unchanged m/m and -0.8% ex-autos m/m.
Retail sales soared by +10.7% m/m in March due to $1,400 stimulus checks, but then faded and were unchanged in April. Still, retail sales are up +16% on the year due to the combination of the fading pandemic and the two rounds of stimulus checks in January and again in March.
U.S. manufacturing production expected to show another strong increase — The consensus is for today’s May manufacturing production report to show a strong increase of +0.8% m/m, adding to April’s increase of +0.4%. The broader May industrial production report is expected to show an increase of +0.7% m/m, adding to April’s increase of +0.5% m/m.
U.S. manufacturing production has risen sharply due to the fading pandemic and the roaring economy. However, the manufacturing sector is seeing some obstacles from supply chain bottlenecks, increased shipping costs, shipping delays, the chip shortage, and higher commodity input prices.
U.S. PPI expected to show another big increase — Today’s May final-demand PPI is expected to show an increase of +0.5% m/m and +6.2% y/y, which would be close to April’s report of +0.6% m/m and +6.2% y/y. Meanwhile, the May core PPI is expected to show an increase of +0.5% m/m and +4.8% y/y, following April’s report of Apr +0.7% m/m and +4.1% y/y.
The markets are taking the current inflation surge in stride since the markets so far seem to agree with the Fed that the inflation surge is transitory. The T-note market largely ignored last Thursday’s May CPI report, which showed extraordinary increases of +8.4% headline and +8.3% core on a 3-month annualized basis.
U.S. homebuilder confidence expected steady — The consensus is for today’s June NAHB housing market index to be unchanged at 83 for the third straight month. The homebuilder confidence index remains in very strong shape at only 7 points below the record high of 90 posted in November 2020. U.S. homebuilders remain very confident due to a shortage of new homes combined with strong demand. However, homebuilders face some obstacles such as higher input costs for lumber and other commodities, supply bottlenecks, and fears that mortgage rates are headed higher.
20-year T-note auction to yield near 2.11% — The Treasury today will sell $24 billion of 20-year T-bonds in the first of two reopenings of the 2-1/4% 20-year bond of May 2041 that the Treasury first sold in May. The benchmark 20-year T-note yesterday closed at 2.11%, in the lower half of the 3-month trading range. The 20-year is slightly below average in popularity among foreign investors and central banks, with indirect bidders taking an average of 60.3% of the last twelve 20-year bond auctions, slightly below the median of 60.5% for all recent coupon auctions.
