All the main U.S. indexes broke to new highs this week, but the rally in the Russell 2000 was particularly impressive. Conversely, the performance of emerging equities continues to underwhelm. And despite a strong jobs report and confirmation that the Fed will start tapering their bond purchases this month, longer-term bond yields declined noticeably.
There were a couple important economic reports. The first was the monthly read on the services sector. The PMI report grew in October for the 17th month in a row, hitting a new high, as you can see below.
Consumers have cash to spend and are still willing to do so.
The other major report was Friday’s jobs report. The US economy added 531K jobs in October, much better than the 450K expected. Just as significant is the fact that the last two reports were also revised higher (+117,000 for August and +118,000 for September). Finally, the unemployment rate fell to 4.6%.
It is worth noting that we haven’t recouped all the jobs lost during the COVID crisis – 4.2 million more American’s remain out of work than in 2020.
From a macro perspective, the idea that the slowdown in third quarter growth was an aberration seems to hold some water. As you can see below, economists expect close to +5% growth this quarter while the volatile Atlanta Fed estimate is currently at +8.5%.
The Fed is Still Spiking the Punch Bowl
Against this backdrop the Fed met on Tuesday and Wednesday to talk about monetary policy, interest rates, and maybe their insider trading shenanigans!
Let’s not forget that the Fed set their policy dials to maximum thrust at the start of the COVID crisis and have yet to dial them back. But on Wednesday they said they would take one small step in that direction. Specifically, beginning later this month, the Fed will reduce the monthly pace of purchases by $15 billion ($10 billion Treasuries and $5 billion mortgages) with a similar reduction expected every mid-month until purchases conclude in mid-2022. The Committee noted they are “prepared to adjust the pace of purchases if warranted by changes in the economic outlook.”
Nothing very radical here. This will slow the growth of their balance sheet through the middle of next year, but critically, they will reinvest maturing bonds. This means their balance sheet will not shrink. The chart below highlights this – slower growth through June then it flatlines.
But between now and June the Fed will still buy another $420bn worth of Treasury and mortgage bonds. Close to half-a-trillion!! To quote MKM’s Michael Darda:
“The Fed’s balance sheet will continue to rise through the middle of next year despite booming nominal growth…The last time we saw wage and employment cost pressures near recent readings, the Fed was at the END of a tightening cycle, not just beginning.”
The Fed is starting a long slow process towards actually hiking rates in the second half of next year, but they are a long way from turning off the liquidity spigots. The Fed’s attitude seems to echo St. Augustine’s plea of “Lord, make me chaste—but not just yet.”
Charts We Found Interesting
1. Case counts appear to be stabilizing around 75K per day.
2. Pfizer’s new COVID pill is good news!
3. A sign of the times – single stock option volumes now consistently exceed the underlying share volumes.
4. Energy Return on Investment (EROI) for different energy sources.
5. The EROIs above probably helps explain this.
6. Oil prices adjusted for inflation. It’s striking how big of an oil shock there was in 2007/2008 and how ‘cheap’ prices are today.
7. They were just 22 years too early. Which is another way of saying they were wrong.
8. Simpler (and more deadly) times.
Have a good weekend.
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