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Al Drago/Bloomberg
The events in Afghanistan didn’t intrude upon the stock market, which remains far more concerned about the course of domestic monetary policy than events abroad.
The market took a hit at midweek after the minutes of the most recent meeting of the Federal Open Market Committee, on July 27-28, were released. They showed the policy-setting panel moving ahead in its discussion about trimming the central bank’s monthly purchases of $120 billion of Treasury and agency mortgage-backed securities. Although the financial emergency triggered by the Covid-19 pandemic has long passed, with asset prices from stocks to single-family houses having soared to records, the bond buying remains a matter of debate.
While the panel agreed that one of the Fed’s two key goals—“substantial further progress” in lifting inflation—had been achieved, most meeting participants didn’t think that the second—maximum employment—had been reached. But if the economy continues to progress as they expect, most of the FOMC members thought that the bond buying could be tapered later this year.
Given how the major equity averages have risen almost in lockstep with the Fed’s balance sheet—now $8.3 trillion, up from $4.2 trillion in March 2020—this is a matter of no small concern for investors. So they will be all ears when Fed Chairman Jerome Powell delivers a much-anticipated keynote address to the annual policy conference at Jackson Hole, Wyo., on Friday at 10 a.m. EDT.
A lot has happened since the FOMC meeting. Most notably, the July employment report showed a 943,000 jump in nonfarm payrolls, while the jobless rate for that month dropped by a big 0.5 of a percentage point, to 5.4%. But there have been downside surprises, as well, notably much weaker-than-expected readings on consumer sentiment, retail sales, and housing starts.
More recently, the impact of the Delta variant of Covid-19 appears evident in real-time gauges of the economy. Bank of America economists saw a “summer chill” in a number of indicators, including a slowing in spending on the bank’s credit and debit cards. The main reason, they argue, was lower spending on leisure services, such as travel (airlines and lodging), entertainment, and restaurants and bars. Indeed, because of Covid concerns, the Fed’s Jackson Hole confab will be held virtually again, media outlets reported on Friday.
The impact of the virus and vaccinations (or lack thereof) also came through in state employment data parsed by Philippa Dunne and Doug Henwood of TLR on the Economy. States with full-vaccination rates above the national average of 51% posted a 0.8% employment gain in July and an average rise of 0.3% from March through June. States with below-average rates trailed, with employment increases of 0.5% in July and 0.2% in the preceding four months.
At the same time, the prices of commodities, most notably crude oil, are sliding, confirming the disinflationary signal from bond yields’ decline.
From a peak of 1.75% at the end of March, the key 10-year Treasury note’s yield has settled into a narrow range, centered at 1.25%. But speculative-grade corporate bonds have struggled of late.
Meanwhile, the major stock averages had weekly losses of about 1% to 1.25%. That left the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite 1.24% to 1.74% below their early-August highs. And that performance is bolstered by the outsize influence of megacap tech stocks on these market gauges.
Over the past three months, the Invesco QQQ exchange-traded fund (ticker: QQQ), which tracks the biggest Nasdaq nonfinancial stocks, is up 12.8%, while the SPDR S&P 500 ETF (SPY) has risen by 7.1%. But the Invesco S&P 500 Equal Weight ETF (RSP) is up just 3.6%, about half as much as the capitalization-weighted SPY.
Not for the first time, the Fed faces conflicting factors.
Powell must balance the rise in the official inflation measures against the reversal in commodity prices and the disinflationary signal of lower long-term Treasury yields. Strong recent jobs reports are being countered by signs of slowing from the Delta variant. But the reopening of schools, the coming end of extra jobless benefits, and the belated step-up in vaccinations could augur better growth.
Given all this, will Powell pivot or punt?
Read More Up and Down Wall Street: After Afghanistan, China and Iran to Pose Tests for U.S.
Write to Randall W. Forsyth at [email protected]
