Equity markets rallied this week on a couple things. First, Fed Chairman Powell basically said nothing to upset the applecart at the annual Jackson Hole meeting (more below). And some optimists started making the case that the spread of the delta variant was peaking. Looking at the charts below you have to squint pretty hard to see that…
…but maybe the dip in the pace of hospital admissions in the hard-hit states is an early sign.
We shall see, but it’s surprising how little impact COVID has had on the markets of late.
Can Inflation and Home Prices…
On the economic front, a couple reports deserve attention. First, more signs that inflation is still running hot. The latest Headline PCE price index was up 0.42% month-over-month (MoM) in July and is up 4.2% year-over-year (YoY). Core PCE (YoY) is now at 3.6%, as you can see below.
Nothing new here, but it will be important when we talk about the Fed below.
The other interesting report concerned new home sales for July. Sales came in slightly above expectations but are still down 27.2% year-over-year – since sales increased sharply following the early months of the pandemic.
What’s probably more interesting is that we are seeing inventory levels tick higher for the first time in months. The months of supply has increased from 3.5 to 6.2 as you can see below.
Soaring housing costs have to be playing a role. The average new home sales price in July 2021 was a record $446,000, up 18% year-over-year. The median price was a record $390,500, up 18% year-over-year.
It’s pretty amazing that even those who bought a home at the peak of the bubble in early 2007 are up roughly 40% since then.
…Coexist With a Dovish Fed?
Normally you’d think the inflation and home price data would motivate the Fed to ‘lean into the wind’, so to speak. You know, take away the punch bowel before the party gets too crazy?
Well, that isn’t going to happen anytime soon. As we noted last week, Fed watchers were focusing on Fed Chair Powell’s Jackson Hole speech to indicate a possible change of policy in the months to come. There were no such signs.
– He repeated the message from last week’s FOMC minutes: “At the FOMC’s recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.”
– It looks like a sure thing that tapering is announced at either the November or December FOMC meetings.
– The rest of the speech was fairly dovish, particularly with respect to inflation. Powell spent more than a third of the speech explaining why the recent inflation news is likely to be transitory.
– The key quote is as follows – “We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis.”
– Actual interest rate hikes are a 2023 issue at the earliest.
And for all the talk about tapering, we should keep things in perspective. The Fed might start reducing their asset purchases by $10bn to $15bn a month starting late this year. It’s awfully unlikely this will have much of an impact. After all, roughly $200bn of new issuance hits the market every month, as you can see below, and despite this supply, rates are historically very low. Tapering might make a slight difference at the margin, but don’t expect a huge reaction.
We should remember we have seen this movie three times already. The chart below shows the Fed’s balance sheet and the three times they have tried to taper in the past.
Maybe I’m getting cynical in my old age, but it’s hard to believe this line is headed lower for a prolonged period of time. At the first sign of weakness/crisis/turmoil renewed asset purchases will commence once again. After all, it’s really the only tool the Fed has left.
Charts We Found Interesting
1. How do the lockdowns in Australia and New Zealand compare? New Zealand’s zero tolerance approach is something else altogether.
2. More on New Zealand – vaccination rates are lagging.
3. Big budget deficits are inflationary, right? That’s the popular narrative, but the data doesn’t support the conclusion. The chart below takes data from 37 countries and plots the average fiscal balance as a percent of GDP over 10 years and compares it to the average annual inflation rate over the 10 years from 2009-19. Not only is there no solid correlation, the sign is wrong. If anything, a higher budget surplus is associated with higher inflation.
4. Time to start shorting used cars?
5. Oregon is different in a lot of ways. Legal drugs across the board, Voodoo Donuts, Powell’s books, and apparently tax policy. In Oregon, when personal income tax revenues come in at least 2% above initial projections, Oregon “kicks” back all the money above projections to taxpayers. Oregon brought in an expected $1.9B above initial estimates this time. Here’s the estimated distribution by income group.
6. In the United States, roughly 10% of agricultural land grows non-animal products eaten by people. The rest of agricultural land is for grazing, animal feed, biofuel, or industrial feedstocks. Corn, soybeans, and wheat dominate planted acreage. Grasslands for grazing (mainly cows) dominate total acreage.
7. This seems like some weird Isaac Asimov alternative universe where the fourth law of robotics is that robots shall not clean. All hail our robot overlords.
Have a good weekend.
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