FOMC Meeting Headlines the Week

The FOMC Meeting on Wednesday will be less about what is said, although any taper talk will get headlines, and more about the updated rate and economic forecasts. While there had been some speculation that the beginnings of taper talk might occur at this meeting it’s not likely with the mediocre jobs report for May and the market’s collective shoulder shrug over the latest CPI numbers. Look for that talk to begin in earnest later in the summer, but perhaps some “chatter” might make it into this meeting. All the transitory rhetoric by the Fed seems to have been absorbed by Treasury investors, and to be fair, the majority of price spikes were in just a handful of categories that had fingerprints of pandemic reopening all over them. As for the updated forecasts, it seems very likely the first rate hike may get pulled from 2024 into 2023 and the overall economic outlook upgraded a touch. The March forecast had 2021 GDP at 6.5% and that might be due for a slight boost higher. The other measures like core PCE and unemployment might see some tweaks as well. The PCE number will be looked at closely for any bump higher but so far, as we said, the spikes seen to date do confirm to the transitory definition. Away from the Fed, Retail Sales for May will be released tomorrow and after a couple months of stimulus check volatility sales are expected to settle into a decent, but not spectacular level.

 


Treasuries

Treasury Curve Today Week Change
3 Month 0.02% Unchanged
6 Month 0.04% +0.01%
1 Year 0.05% +0.01%
2 Year 0.15% Unchanged
3 Year 0.31% Unchanged
5 Year 0.74% -0.06%
10 Year 1.46% -0.12%
30 Year 2.15% -0.11%

Short-Term Rates

Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.12%
6 Mo LIBOR 0.15%
12 Mo LIBOR 0.24%
Swap Rates  
3 Year 0.413%
5 Year 0.823%
10 Year 1.437%

 

Economic Calendar

Date Statistic For Briefing Forecast Market Expects Prior
Jun 15 Retail Sales MoM May -0.6% -0.6% 0.0%
Jun15 Retail Sales Ex Auto & Gas My -0.2% 0.0% -0.8%
Jun 15 Retail Sales Control Group May -0.6% -0.4% -1.5%
Jun 15 Empire Manufacturing Jun 22.0 22.0 24.3
Jun 15 Industrial Production MoM May 0.6% 0.6% 0.5%
Jun 16 FOMC Rate Decision Jun 16 0.00%-0.25% 0.00%-0.25% 0.00%-0.25%
Jun 16 Housing Starts MoM May 4.2% 4.5% -9.5%
Jun 16 Building Permits MoM May -0.2% -0.2% -1.3%
Jun 17 Leading Index May 1.2% 1.3% 1.6%

 


Top 5 Events for the Week

June 14—18, 2021

1.  FOMC Rate Decision—Wednesday

The FOMC Meeting on Wednesday will be less about what is said, although any taper talk will get headlines, and more about the updated rate and economic forecasts. While there had been some speculation that the beginnings of taper talk might occur at this meeting it’s not likely with the mediocre jobs report for May and the market’s collective shoulder shrug over May’s CPI numbers. Look for that talk to begin in earnest later in the summer; however, some taper “chatter” may find it’s way into the meeting. All the transitory rhetoric by the Fed seems to have been absorbed by Treasury investors, and to be fair, the majority of price spikes were in just a handful of categories that had fingerprints of pandemic reopening all over them. As for the updated forecasts, it seems very likely the first rate hike may get pulled into 2023 from 2024 and the overall economic outlook upgraded a touch. The March forecast had 2021 GDP at 6.5% and that might be due for a slight upgrade. The other measures like core PCE and unemployment might see some tweaks as well.

2. May Retail Sales—Tuesday

Retail sales have been buffeted in recent months with the impact of stimulus checks being spent in grand amounts in March and then a notable plateauing in April. May should provide some measure of normalcy to what we can expect in the months ahead without the overwhelming impact of those stimulus checks. For the month, retail sales are expected to be decrease –0.6% versus an unchanged reading in April but that came on the heels of a nearly 10% pop in March, so just holding ground against March’s surge is commendable. Sales ex-auto and gas are expected to be unchanged in May after April’s –0.8% dip. The retail sales control group—a direct feed into GDP—is expected to post a  -0.4% decrease versus a -1.5% dip in April. In all, a fairly pedestrian result is expected in May but after the strong surge in March and generally similar sales levels in April a little give-back is not unexpected.

3. May Industrial Production—Tuesday

The manufacturing sector has been a bright spot from the earliest days of the post-lockdown economy and while a hand-off of sorts is expected from the goods-side to the services-side as re-openings moves across that sector of the economy, it looks like May will continue to be another strong month for manufacturing. For May, industrial production is expected to increase 0.6% MoM, versus 0.5% in April. Capacity Utilization is expected to increase to 75.1% versus 74.6% the prior month. As the graph below shows, capacity utilization is moving up but still has yet to recapture its pre-pandemic level. In summary, industrial production and the goods-side of the economy look to continue operating without a hiccup as we move fully a year into the recovery.

Source: Bloomberg

4. May Housing Starts and Permits—Wednesday

The housing market is one sector of the economy that has largely kept up the momentum from the early months of the recovery, but a pause in January and February had some starting to squirm a bit, but the numbers improved in March but disappointed again in April. For May, starts are expected to increase 4.5% to 1.640 million units annualized versus April’s –9.5% drop, or 1.569 million units annualized. Permits are expected to be relatively unchanged from April  decreasing slightly by –0.2% to 1.730 million annualized versus 1.733 million in April. So after a soft patch in early 2021 housing starts and permits are expected to generally remain solid and that activity should improve in the summer as modestly lower mortgage rates and below-peak lumber prices boost additional sales.

5. May Leading Index-Thursday

The Leading Index-a gauge of nearly 80 variables that tend to move before the overall economy– plumbed new depths this time last year, as one would expect, but rebounded smartly in the summer only to plateau moving into year-end as virus case counts started spiking again.  But vaccines getting into more people, and case counts continuing to trend lower, the index has been rebounding of late. Any reading below zero constitutes a soon-to-be contracting economy while above zero reflects an expanding economy. For May, the index is expected to move up  1.3%  versus 1.6% in April. Thus, the Leading Index for May is expected to reflect an economy continuing its growth trajectory but with a slight moderation to that growth.

 


 

Yield Universe

 

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Published: 06/14/21 Author: Thomas R. Fitzgerald