Fed Speak and Another Inflation Number This Week

After the FOMC meeting last week—and its two hikes in 2023 scenario—put some volatility into markets, investors will be eager to hear more from Fed officials this week to gain additional color on their thinking. With nine Fed officials set to talk this week we will get our wish for additional information, but will we get clarity? We mentioned last week that it was important to determine who is saying what as regional Fed presidents don’t carry the same weight in deliberations as do Fed governors. For example, St. Louis Fed President James Bullard created headlines last Friday that given inflationary concerns rate hikes may need to commence next year. So we know one of those dots calling for a 2022 rate hike. Trouble is Bullard doesn’t have a vote this year so take his attention-seeking comments with a grain of salt. We will, however, get commentary from plenty of FOMC voters, including Chair Powell tomorrow. Get ready for a heavy dose of Fed headlines again this week.  As far as economic news, the Personal Income and Spending Report for May will get plenty of attention on Friday. While the income and spending numbers will certainly get noticed, it is likely that the inflation numbers in the report will get the most attention. The Fed’s preferred inflation gauge, core PCE, is expected to increase 0.6% for the month bringing the year-over-year number to 3.4% from 3.1% in April.

 


Treasuries

Treasury Curve Today Week Change
3 Month 0.03% +0.01%
6 Month 0.05% +0.01%
1 Year 0.08% +0.03%
2 Year 0.26% +0.11%
3 Year 0.49% +0.18%
5 Year 0.89% +0.15%
10 Year 1.44% -0.02%
30 Year 2.03% -0.12%

Short-Term Rates

Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.13%
6 Mo LIBOR 0.16%
12 Mo LIBOR 0.24%
Swap Rates  
3 Year 0.569%
5 Year 0.942%
10 Year 1.407%

 

Economic Calendar

Date Statistic For Briefing Forecast Market Expects Prior
Jun 21 Existing Home Sales May 5.71mm 5.71mm 5.85mm
Jun 21 Existing Home Sales (MoM) May -2.4% -2.4% -2.7%
Jun 23 New Home Sales May 875k 871k 863k
Jun 23 Advance Goods Trade Balance May -$87.7b -$87.7b -$85.2b
Jun 24 Durable Goods Orders May 3.0% 2.9% -1.3%
Jun 24 Durable Goods Orders Ex-Transportation May 0.8% 0.7% 1.0%
Jun 25 Personal Income May -2.8% -2.7% -13.1%
Jun 25 Personal Spending May 0.3% 0.4% 0.5%
Jun 25 Core PCE (YoY) May 3.5% 3.4% 3.1%

 


Top 5 Events for the Week

June 21—25, 2021

1.  Fed Speak—All Week

After the FOMC meeting last week—and its two hikes in 2023 scenario—put some volatility into markets, investors will be eager to hear more from Fed officials this week to gain additional color on their thinking. With eight Fed officials set to talk this week we will get our wish for additional information. We mentioned last week that it was important to determine who is saying what as regional Fed presidents don’t carry the same weight in deliberations as do Fed governors. For example, St. Louis Fed President James Bullard created headlines last Friday that given inflationary concerns rate hikes may need to commence next year. So we know one of those dots calling for a 2022 rate hike. Trouble is Bullard doesn’t have a vote this year so take his attention-seeking comments with a grain of salt. We will, however, commentary from plenty of FOMC voters, including Chair Powell tomorrow. Get ready for a heavy dose of Fed headlines again this week.

2. May Personal Income and Spending—Friday

The personal income and spending numbers have been volatile of late with stimulus checks flowing through the income numbers in March and flowing through the spending numbers in March and April.  Some settling is expected in May with personal income forecasted to decrease  -2.7% versus a –13.1% decrease in April. Personal spending, meanwhile, is expected to increase 0.4% versus a 0.5% increase in April. While on paper a 0.4% gain does not look overly impressive by managing to hold onto the spike in spending in March—it rose 4.7%— it works out to a very respectable result.  The all important inflation number in the report that the Fed prefers (Core PCE) is expected to increase 0.6% MoM and 3.4% YoY from 3.1% in April. The Fed will obviously want to see this start to plateau in the coming months and start to drift lower to conform to their “transitory” narrative.

Source: Bloomberg

3. May New and Existing Home Sales—Tuesday/Wednesday

While new home sales only account for about 10% of the housing market they do bring with it all the elements that go into the construction of a home and so it is an important input to GDP and also to the health of the housing market. For the month of May, sales are expected to lift a bit  after April’s somewhat disappointing results. Sales are expected to increase 0.9% month-over-month to 871 thousand units sold on an annualized basis. Some of the pause in activity is from a lack of inventory and also from price increases after lumber costs reached new highs in April. Meanwhile, existing home sales—accounting for 90% of the residential market— are expected to be down slightly from April’s results. The May print is expected to  see sales decrease –2.4% month-over-month to 5.71 million houses from 5.85 million sold in April, on an annualized basis.  This would be the fourth straight month of declining sales after January peaked at 6.66 million. Scarce inventory and rapid price appreciation seems to be creating a modest headwind to the housing sector.

4. May Durable Goods Orders—Thursday

The manufacturing side of the economy has been strong since early in the pandemic, not having the face-to-face constraints of the more service-oriented businesses. Consumer consumption has also focused more on hard goods over services and durable goods orders have followed suit in posting solid activity during much of the pandemic. The current thought is that with the economy reopening more and more that the services-side of the economy will take a hand-off from the manufacturing side and carry the economy in the second half of 2021. In the meantime, for May, orders are expected  to increase 2.9% after a decline of –1.3% in April. Orders less the volatile transportation sector are expected to increase 0.6% versus 2.2% in April. So it looks like the durable goods side of the economy will continue it’s solid performance through May.

5. May Advance Goods Trade Balance-Thursday

With the goods side of the economy performing well, it’s no surprise that the goods trade balance continues to post wider deficits as demand for off-shore products continues along with on-shore products. The goods deficit for May is expected to widen to -$87.7 billion versus -$85.2 billion in April.  The deficit peaked at -$90.6 billion in March which was an all-time record and reflects the strong goods demand this year.

 


 

Yield Universe

 

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Published: 06/21/21 Author: Thomas R. Fitzgerald