Traders are expected to pay special attention this week to the virtual presence of Federal Reserve policymakers at the bank’s annual Jackson Hole Economic Policy Symposium.
The conference, which runs from Thursday through Saturday this week, is expected to provide a forum for further discussion on Fed policymakers’ plans to announce and implement a monetary policy shift. Specifically, investors have been waiting months to hear when government will begin tapering their monthly purchases of Treasury and mortgage securities, which have been running at $120 billion per month for more than a year during the pandemic.
This asset purchase program has been a crucial policy underpinning U.S. equities markets this year, providing liquidity throughout the virus-induced economic crisis. However, as the economy improves, Fed officials’ chatter of reducing the program’s scope has increased.
Last week, Federal Reserve officials hinted that the start of tapering might be announced soon. Most monetary policymakers anticipated the economy would have made enough progress toward recovery to warrant tapering, according to the minutes of the Federal Reserve’s July meeting.
“Most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee’s ‘substantial further progress’ criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum employment goal,” according to the FOMC minutes.
But as many pundits have noted, the central bank still has a host of meetings left in 2021 to serve as a platform for further discussing or announcing tapering. As a result, Jackson Hole this week may cause few ripples, with policymakers like Federal Reserve Chair Jerome Powell sticking to their previously telegraphed language about waiting to see further improvements in the labor market before escalating talk of tapering further.
“Jackson Hole next week is certainly a target for when we might hear some actual firm language around taper. I’m not really expecting much out of Jackson Hole,” Garrett Melson, Natixis Investment Managers Solutions portfolio strategist, told Yahoo Finance last week. “We’re more in the camp that we probably start to hear something around the November meeting. Perhaps they’re as quick as December to start actually implementing the taper. But I’m still more in the camp that January is probably when we begin to see a slow taper, probably in the ballpark of $15 billion per month.”
“They’re still very, very dovish. They’re slightly less dovish,” he added. “But that’s a little semantics at this point. Taper is very well documented and well known. We know it’s coming. It’s just a matter of timing and really shouldn’t surprise many investors out there.”
As for the ultimate market impact of tapering, if the outcome is anything like the response from the last announcement of tapering in 2023, investors might brace for a momentary bout of volatility and some sector rotation beneath the surface.
“In 2013, Fed Chair Bernanke’s comments about tapering catalyzed a five-day, 40 bp backup in 10-year yields and a 5% drop in the S&P 500,” said David Kostin, Goldman Sachs’ chief U.S. equity strategist, in a note last week. “The initial signal from the taper tantrum ultimately proved fleeting during a year with extremely strong returns for equities.”
“The S&P 500 rebounded 5% in the roughly two months following the tantrum, led higher by the materials, consumer discretionary, and health care sectors,” he added. “By December, the S&P 500 had posted a full-year return of 32%. As the Fed reiterated its commitment to accommodative policy, growth outperformed value and cyclical stocks outperformed defensives.”
Personal spending, income
Consumer spending and income statistics will be in the spotlight later this week, with reports on both metrics expected out on Friday.
Personal expenditure is expected to decrease to just 0.4 percent monthly in July, down from 1.0 percent in June, according to consensus experts.
Retail sales declined more than predicted in July, according to figures released by the Commerce Department just last week. As the benefit of stimulus checks earlier this year faded, the print indicated more restraint in spending and lowered the threshold for the Bureau of Economic Analysis’ monthly personal spending report.
Other data has also pointed to a decrease in consumer spending, particularly in light of the Delta variant’s recent spread, which began in the middle of summer.
“Although services spending started strong in July boosted by the holiday, our aggregated BAC credit and debit card data suggest services spending, particularly for travel and leisure, slowed down noticeably in the second half of the month, potentially due to rising Delta concerns,” Bank of America economist Michelle Meyer wrote in a note Friday.
Friday’s consumer spending report will also come with data on personal income, which is also expected to have ticked up only slightly on a monthly basis. Economists look for a 0.1% increase in July, which would match the pace from the prior month.
Even with the deceleration in income, however, the personal savings rate may have increased as an early round of child tax credit payments helped offset a slowing pace of income growth, some economists noted.
“The advance child tax credit payments delivered this month translated into a lower tax burden and therefore a 1% month-over-month boost to disposable income, consequently leading to a rise in the savings rate to 10.0% from 9.4% in June,” Meyer predicted.
- Monday: Chicago Fed National Activity Index, July (0.09 in June); Markit U.S. Manufacturing PMI, August preliminary (62.8 expected, 63.4 in July); Markit U.S. Services PMI, August preliminary (59.0 expected, 59.9 in July); Markit U.S. Composite PMI, August preliminary (59.9 in July); Existing home sales, month-on-month, July (-0.3% expected, 1.4% in June)
- Tuesday: Richmond Fed Manufacturing Index, August (25 expected, 27 in July); New home sales, month-on-month, July (3.6% expected, -6.6% in June)
- Wednesday: MBA Mortgage Applications, week ended August 20 (-3.9% during prior week); Durable goods orders, July preliminary (-0.2% expected, 0.9% in June); Non-defense capital goods orders excluding aircraft, July preliminary (0.5% expected, 0.7% in June); Non-defense capital goods shipments excluding aircraft, July preliminary (0.6% in June)
- Thursday: Initial jobless claims, week ended August 21 (352,000 expected, 348,000 during prior week); Continuing claims, week ended August 14 (2.780 million expected, 2.820 million during prior week); GDP annualized quarter-over-quarter, Q2 second estimate (6.6% expected, 6.5% in prior print); Personal consumption, Q2 second estimate (12.3% expected, 11.8% in prior print); Core PCE quarter-over-quarter Q2 second estimate (6.1% expected, 6.1% in prior print); Kansas City Fed Manufacturing Activity Index, August (30 in prior print)
- Friday: Advanced goods trade balance, July (-$90.9 billion expected, -$91.2 billion in June); Wholesale inventories, month-over-month, July preliminary (1.0% expected, 1.1% in June); Personal income, July (0.2% expected, 0.1% in June); Personal spending, July (0.4% expected, 1.0% in June); PCE core deflator, month-on-month, July (0.3% expected, 0.4% in June); PCE core deflator, year-on-year, July (3.6% expected, 3.5% in June); University of Michigan Sentiment, August final (71.0 expected, 70.2 in prior print)
- Monday: No notable reports scheduled for release
- Tuesday: Advance Auto Parts (AAP) before market open; Intuit (INTU) after market close
- Wednesday: Best Buy (BBY) before market open; Salesforce (CRM), Autodesk (ADSK), Ulta Beauty (ULTA) after market close
- Thursday: The JM Smucker Co. (SJM), Dollar General (DG), Dollar Tree (DLTR) before market open; The Gap (GPS), HP Inc. (HPQ) after market close
- Friday: No notable reports scheduled for release
Source: Yahoo News