All of the sudden, all seemed well. Or at least well enough. Just like that.
The upside catalyst on Wednesday was news that the main unit of deeply troubled Chinese property developer Evergrande would likely make its Thursday bond coupon payments. It remains unclear just how much offshore debt would or would not be serviced, but fears of an imminent default by the real estate giant subsided. For now. Equity markets around the globe, include U.S. markets. went into Wednesday's FOMC policy statement with a good head of steam.
That momentum only picked up the pace as that statement and the Fed's economic projections were made public. There was a wobble or two, as Fed Chair Jerome Powell took questions from the financial media, but a late selloff never actually developed.
There was little volatility across Treasury or currency markets. Global equities for the most part strengthened alongside U.S. equity index futures as the overnight hours passed.
It was as if markets heard what they wanted to hear, when the fact was much more simple. Market participants heard exactly what they had anticipated. There were to be no surprises. That would be good enough.
Heads Up
Beijing has just told Evergrande to avoid a near-term dollar bond default. Does this pave the way for a government takeover of the real estate developer? The PBOC also injected $120B yuan into the banking system through reverse repo agreements while you were sleeping.
Wednesday's Child...
....Was anything but full of woe. The combination of a belief that China was not about to plunge the global economy into darkness with a reasonable sounding FOMC forced a bit of air into the sails of the reflation trade. Cyclical sectors led defensive-type groups.
Notably, financials performed well. The Financial Sector Select SPDR ETF (XLF) gained 1.7% on the day as the KBW Bank Index scored an increase of an even 2%. This, in isolation, was more of an Evergrande relief rally as banks did not rally 2% on yield spreads that largely flatlined.
Market Breadth was fantastic. Winners beat losers by a margin of 4 to1 at the NYSE, and by roughly 5 to 2 at the Nasdaq. Advancing volume bested declining volume by an almost stunning 13 to 2 at the NYSE and by slightly less than 3 to 1 at the Nasdaq.
Aggregate trading volume flatlined at somewhat elevated levels for NYSE-domiciled names, while increasing slightly for Nasdaq listed stocks. The only cyclical group that really saw any red on Wednesday were the Dow Transports, and that was specifically due to the 9.1% post earnings beatdown suffered by FedEx (FDX) . Just an FYI, I still have not sold that final tranche but still intend to.
Straight Forward
The official Fed policy statement, which has become a hallmark of the Fed under Jerome Powell's leadership, was short, mostly just a cut and paste job from the prior meeting, with a specific change made where it would be most understood. I will tell you this: Powell's Fed since the start of the pandemic has been the most efficiently run Fed from a policy perspective in decades. Questionable trading practices by Fed officials might be another story, one I probably should not comment heavily on, but policy-wise, this Fed (since blundering through 2018) has been straight forward about its intentions without at any point surprising financial markets -- and quite frankly along with the Treasury Department under former Secretary Steven Mnuchin literally saved the U.S. and probably global economies. Not an overstatement.
The one sentence from the statement that changes forward-looking intent was clear. On July 28: "Since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings." That has become by Sept. 22: "If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted." This, quite bluntly, signals, if conditions merit, the announcement of reduced or tapering of the Fed's quantitative easing program by the next FOMC policy statement, which is scheduled for Nov. 3.
Powell told reporters flat out that the tapering "could come as soon as the next meeting." Then he added, "The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff."
The attempt was to divorce the removal of overt economic liquifiction from the outright tightening of policy. Yet, one only has to look at the FOMC's economic projections supported by their truly absurd dot plot to see where the Fed's consensus is.
Life Is Just a Fantasy
The broader group is more hawkish in concept than is the Fed Chair in presentation. Nine "dots" now see the fed funds rate higher at some point in 2022 than it is now (0% to 0.25%), with three dots seeing the FFR 50 basis points higher. This is up from seven dots above the zero bound just three months ago, the last time we brought in the jugglers and the plate spinners.
Turning to the Fed's economic projections, one quickly sees the ridiculousness of it all. It is far past time to get rid of this release, as its usefulness as a tool of forward guidance has never been particularly accurate. If one takes these projections as face value, then one believes that U.S. economic activity grows 5.9% this year, but then growth decelerates to 3.8% in 2022, 2.5% in 2023, and 2.0% in 2024, while core consumer-level inflation runs at 3.7% this year, followed by 2.3%, 2.2%, and 2.1% in subsequent years.
Fair enough. I do believe that economic growth has been supported as much by fiscal policy as anything else and will wane. I do believe that at least a substantial portion of the consumer-level inflation experienced this year will prove more transitory than structural.
The unrealistic part is that as economic growth and inflation both slow, the FOMC thinks that the fed funds rate will continue to rise.
The group's consensus is that the FFR goes out this year where it is, at 0.1%, then 0.3% in 2022, followed by 1.0% in 2023 and 1.8% in 2024... oh and just for funzies... 2.5% over the longer run. You do see how far fetched these rate hikes would be in the environment that the FOMC thinks they will implement tighter policy in, correct? Not gonna happen. Can't happen.
You can eat an apple. You can eat an orange. You can not eat an apple and an orange at the same time. Well, maybe you can, but this is the Fed, and they react to changing economic conditions.
The fact (more like my opinion) is that the Fed would like to get a rate hike on the tape by late 2022. That means that initiating reduced asset purchases happens this year and proceeds aggressively through the first half of 2022. That should not be too hard to accomplish given the more hawkish complexion of the voting committee membership next year compared to this year.
Another fact would be that 2022 is already the year of the midterm elections. Taking action, regardless of how appropriate that slows economic activity during an electoral season comes with a whole new set of thorns.
Not to mention that our esteemed legislators are currently haggling over the debt ceiling, a large infrastructure bill, and a much, much larger spending package. Just who do you think they expect to finance these adventures? Yes, they will go through your pockets, but that will never even approach what will be required. They will turn to the Federal Reserve and they will expect to be able to borrow newly created cash at highly discounted rates.
TINA may fall in and out of your life, but she is going nowhere long-term. We're stuck with her.
Three Ring Circus
The House of Representatives passed a short-term bill meant to keep the federal government open past the Oct. 1 "deadline" when Treasury Secretary Janet Yellen expects to run out of cash. 220 Democrats voted for passage, while 211 Republicans voted against, underscoring the lack of any real chance for this bill to get through the U.S. Senate where the reconciliation process is not an option and at least 10 Republican senators would have to vote with the Democratic caucus in order to get the bill to the president's desk.
This is where the Republicans in our legislature have chosen to make a stand in an attempt to downsize the budgetary framework set forth by President Biden. Just as the far left has chosen to stand against the infrastructure bill in attempt to get the larger spending package across the goal line, this is really the only place where Senate Republicans have enough power to play any defense should they lose the two politically moderate Democratic Senators that have been more conservative fiscally, once they are granted whatever it is they need for their states by the rest of those on the left side of the aisle.
We're not in a good spot, folks. This is not left versus right. This is extreme left versus moderate left versus right. Three ring (at least) circus.
Boosters
The FDA, on Wednesday, authorized a third dose of the Pfizer (PFE) , BioNTech (BNTX) messenger RNA Covid-19 vaccine for those aged 65 years or older or at heightened risk of disease and death due to where they live or what they do occupationally. The shots, according to the authorization should be given at least six months after one receives their second jab.
Those qualified will likely see these booster shots available to them within days, once the CDC votes on just who gets shots. Moderna (MRNA) boosters are likely not far behind, with those receiving the Johnson & Johnson (JNJ) jab likely having to wait a bit longer than that. No word yet on when younger or broader populations will be eligible. Speaking just for me, a man in his late 50s... I hope it's sooner rather than later.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 317K, Last 332K.
08:30 - Continuing Claims (Weekly): Last 2.665M.
09:45 - Markit Manufacturing PMI (Sep-Flash): Expecting 61.5, Last 61.1.
09:45 - Markit Services PMI (Sep-Flash): Expecting 55.0, Last 55.1.
10:00 - CB Leading Indicators (Aug): Expecting 0.7% m/m, Last 0.9% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +83B cf.
11:00 - Kansas City Fed Manufacturing Index (Sep): Last 29.
The Fed (All Times Eastern)
No public appearances scheduled.
