- FOMC minutes soothe the marketsÂ
- U.S. unemployment claims expected to show a continued improvement in the U.S. labor market
FOMC minutes soothe the markets — The Fed continues to stave off a taper tantrum even as Fed officials actively discuss QE tapering. The markets greeted yesterday’s minutes from the June 15-16 FOMC meeting as relatively dovish, even though the FOMC did, in fact, begin its discussions on QE tapering.
The minutes said, “The committee’s standard of ‘substantial further progress’ was generally seen as not having yet been met, though participants expected progress to continue.” However, the minutes also said that “Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings.”
FOMC members expressed increased concern about inflation. The minutes said FOMC members “generally expected inflation to ease” once transitory factors subside, but that “a substantial majority of participants judged that the risks to their inflation projections were tilted to the upside.”
The minutes also said, “Several participants remarked that they anticipated that supply chain limitations and input shortages would put upward pressure on prices into next year. Several participants noted that, during the early months of the reopening, uncertainty remained too high to accurately assess how long inflation pressures will be sustained.”
The U.S. stock and bond markets showed a mildly bullish reaction to the release of the FOMC minutes. The S&P 500 and Nasdaq 100 indexes both posted record highs yesterday and closed mildly higher, with the S&P closing up +0.34% and the Nasdaq 100 closing up +0.16%.
The 10-year T-note yield yesterday fell to a new 4-1/2 month low and closed the day down -3.2 bp at 1.32%, the lowest level since February. The T-note yield continues to fall as the market shows little concern about the Fed’s eventual QE tapering or about the current strength in the economy and inflation. The T-note market instead appears to be expecting the economy and inflation to ease later this year and for the Fed to take its time on QE tapering.
The T-note yield began its latest slide last Friday when the June U.S. unemployment rate rose +0.1 point to 5.9%. The current unemployment rate of 5.9% is still well above the record low of 3.5% seen in the months before the pandemic struck in early 2020. In addition, the U.S. economy has recovered only two-thirds of the jobs lost during the pandemic and needs to produce another 6.8 million jobs to get back to the pre-pandemic level.
Regardless of the dovish tone of the FOMC minutes, the fact remains that FOMC members at the June 16-17 meeting turned significantly more hawkish on the need for interest rate hikes over the next several years. The new FOMC dot-plot from the meeting showed that 7 of the 18 FOMC members are now expecting at least one +25 bp rate hike in 2022, and 11 of the 18 members are expecting a total of at least two rate hikes by the end of 2023.
While the T-note market is currently trading on a very dovish note, time is marching forward towards an eventual QE tapering. A survey taken by Bloomberg in June showed a consensus that the Fed’s early warning of QE tapering will come at either the August Jackson Hole conference or the following FOMC meeting on September 21-22. That survey showed that 33% of the respondents expect the formal announcement of QE tapering in September, 10% in October or November, and 33% in December.
The markets are expecting the Fed’s first +25 bp rate hike in late 2022, according to the federal funds futures market. The markets are then expecting two more +25 bp rate hikes in 2023.
U.S. unemployment claims expected to show a continued improvement in the U.S. labor market — Today’s weekly U.S. unemployment claims report is expected to show a continued improvement in the U.S. labor market.
The consensus is for today’s initial claims report to show a decline of -14,000 to 350,000, adding to last week’s -51,000 decline to a new 16-month low of 364,000. Initial claims are now up by only +148,000 from the pre-pandemic level.
The consensus is for today’s continuing claims report to fall -119,000 to 3.350 million, which would be a new 15-1/2 month low. Continuing claims last week showed some backsliding and rose by +56,000. Continuing claims are still 1.76 million above the pre-pandemic level.
There was some good news yesterday on the labor front with the report that May JOLTS job openings rose by +16,000 to a new record high of 9.209 million. Job openings so far this year have surged by 27% and are 2.5 million above the pre-pandemic level. Businesses are looking for new employees as the pandemic fades and business restrictions drop away.
Hiring is strong in the revived restaurant, entertainment, and travel sectors. However, hiring is also strong in the manufacturing sector and many other sectors of the economy because of the strength of the economy.
The consensus is for U.S. GDP growth to surge by +10.0% (q/q annualized) in Q2, and remain strong through the end of the year. The consensus is for 2021 GDP growth of 6.6%, which would more than overcome the -3.5% decline seen in 2020 and would be the strongest U.S. GDP annual growth rate since 1984.
