Good Thursday AM,
Yesterday’s Fed meeting was a bit of a nail biter as the FOMC statement and subsequent press conference could have gone either way. Hawkish and rates could have spiked, dovish and rates could have dipped. Fear was driving the market sentiment toward the former. That said, no one expected and markets knew the Fed would not change any of the current policies (current Fed funds rate or the amount of bonds the Fed has been buying). The concern was if the Fed would telegraph a reduction in bond purchase in the coming months or an expectation of a rate hike sooner than previously expected. We dodged the bullet and neither of those happened. The Fed reasserted that the economy has a long way to go and that recent upticks in inflation metrics are transitory. These are really smart guys as today’s data was exactly what they predicted. Today we saw the GDP numbers and they missed expectations by a longshot! We also saw that once again jobless claims are much higher than anticipated and pending home sales tanked! All very bond friendly and I this would normally translate into a continuation and acceleration of this bond rally, but there is a catch. Tomorrow we get the Personal Consumption Expense numbers and they are more important to the FED than CPI. If those numbers come in hot, it will negate the low GDP numbers and we pause this rally. On the other hand, if the numbers come in tamer than expected it could be game on for bonds and rates. We need to get past today though, which is fraught month-end trading, earnings, and technicals to drive any intraday volatility. That China shared it will allow companies to once again list on US exchanges will be a boost to equities. Additionally, next week brings the monthly jobs report which, of course being the biggest release of the month, will be a driver for rates as well. As I am typing this and thinking of my perspective on rates, I see a fairly strong bias to lower rates in the short terms and of course reserve the right to change that position.
The hits just keep on coming. I do not understand why the government continues to reward people for not working at the expense of those who do but… the Biden administration is requesting that Congress act to extend a federal moratorium on the evictions of tenants who have fallen behind on their rent during the Covid-19 pandemic, citing tenants’ “heightened vulnerability” because of the Delta variant of the virus. The existing moratorium is scheduled to expire on Saturday. Anyone want to buy a rental property?
Today’s GDP report was disappointing. Economists had forecast growth accelerating to a 8.4% in the second quarter. Instead, the topline figure landed at 6.5%—I cannot overemphasize how big of a miss this is after trillions in government stimulus, alongside low rates and unprecedented bond purchases from the Federal Reserve. The miss is so big that it is larger than the annual GDP for years prior to the pandemic. If anyone thinks the economy has recovered, this is a great point to consider. It is more likely the economy has topped out, is still smaller than it was before the pandemic, and the Delta Variant is likely to do further damage. The economy is roughly 2.4% smaller than it would have been had Covid never hit and growth trends continued. Employment is still almost 7 million short of pre-pandemic levels. There is still an ‘output gap,’ which is consistent with the level of payrolls still 4.4% below their pre-pandemic peak.
The data simply put, confirms the recovery is far from complete. The economy is roughly 2.4% smaller than it would have been had Covid never hit and growth trends continued. Employment is still almost 7 million short of pre-pandemic levels. The level of payrolls still 4.4% below their pre-pandemic peak.
Enough for today.
Please remain safe and healthy, make today great!
