Powell’s Inflation Message Gets Muddled

One day after rolling out the Fed’s new Monetary Policy Framework several officials took to microphones and delivered a mixed follow-up as to what the new policy might look like in practice. From Chair Powell’s Jackson Hole speech it seemed clear to us they were going to lean more heavily on the full employment mandate and give inflation a little more room to run as long as it was within reach of the 2% target. Some Fed officials on Friday tried to walk back that impression from Powell that the Fed would let the economy run hot in order to ratchet down unemployment as quickly as possible. In reading the entirety of Powell’s address it struck us as unmistakable that the Fed will let the economy have freer rein to ramp before the proverbial punch bowl is taken away (i.e., rate hikes). While the long-end of the bond market has backed up in yield under the assumption inflation will be coming, we only add the Fed has been wanting inflation to get to 2% for the last decade and has failed. So wanting something to happen and having it happen are two entirely different things in our view. Away from the Fed we’ll continue to watch with a glancing  side-eye whether DC can deliver Stimulus 2.0, and, of course, it’s jobs week with the August report expected to be solid if off the gains of recent months.

Treasury Curve Today Week Change
3 Month 0.09% UNCH
6 Month 0.10% -0.01%
1 Year 0.11% -0.01%
2 Year 0.13% -0.02%
3 Year 0.15% -0.02%
5 Year 0.28% +0.01%
10 Year 0.74% +0.10%
30 Year 1.52% +0.17%
Short-Term Rates
Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.24%
6 Mo LIBOR 0.31%
12 Mo LIBOR 0.45%
Swap Rates
3 Year 0.234%
5 Year 0.344%
10 Year 0.740%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Aug 31 ISM Manufacturing Aug 54.5 53.6 53.2
Sep 1 Construction Spending MoM Jul 1.1% 1.0% -0.7%
Sep 2 ADP Employment Change Aug 900k 975k 167k
Sep 2 Factory Orders Jul 5.9% 6.0% 6.2%
Sep 3 Trade Balance Jul -$52.7b -$57.9b -$50.7b
Sep 3 ISM Services Aug 57.0 57.0 58.1
Sep 4 Change in Payrolls Aug 1.350mm 1.400mm 1.763mm
Sep 4 Unemployment Rate Aug 9.8% 9.8% 10.2%
Sep 4 Labor Force Participation Aug 61.7% 61.7% 61.4%

calendar icon Top 5 Events for the Week

Aug. 31 — Sept. 4, 2020

1.  D.C. Developments — All Week
2.  August Employment Report — Friday
3.  August ISM Manufacturing — Monday
4.  August ISM Services — Thursday
5.  July Trade Balance — Thursday


1.  DC Developments — All Week

With a stimulus bill all but dead for now, after the latest $1.3 trillion offer from the White House was rejected by House Speaker Pelosi, the focus will  shift some from bill-watching to signs that the fading stimulus is starting to show in consumer behavior and hard data. So far we haven’t seen either other than the some slowing in momentum from June to July, save the housing sector, but the slowing is modest at best. If signs start to appear that confidence is faltering, and spending and hiring drops precipitously you can expect renewed enthusiasm in the White House and the halls of Congress for a stimulus bill.


2.  August Employment Report — Friday

The monthly  employment report is slowly returning to its rightful place atop economic reports after the volatility of the last several months rendered it less useful. With some easing in that volatility the reports are once again becoming critical as a gauge of the rebound in the economy. The current consensus expectation is for 1.40 million new jobs which would be impressive  but off last month’s 1.76 million. The range of estimates, however, continue to be wide with a high estimate of 2.4mm to a low of 500k. So a wide beat or miss is possible given the wide range of estimates. Expectations are for the unemployment rate to fall to 9.8% from 10.2% in July.


3.  August ISM Manufacturing — Monday

In addition to the jobs report on Friday we’ll get the ISM Manufacturing Index this morning and the Services index on Thursday. Both are expected to indicate that the rebound in that began in May is carrying through the summer. The manufacturing index is expected to  print a 53.6 versus 53.2 in June. 50 is the dividing line between an expanding sector and contracting one, so continued expansion is expected in a sector that printed a deeply recessionary low of  41.5 back in April.


4.  August ISM Services — Thursday

While the manufacturing index gets more attention, the services sector does account for about 90% of the economy so it obviously has more influence overall. The services index is expected to slip a bit from 58.1 in July to 57.0 in August, still in solid expansionary territory and well above the April low of  41.8. That difference shows magnitude of the economic freeze from lockdowns to a robust rebound this summer.


ISM Manufacturing and Services


5.  July Trade Balance — Thursday

The July Trade Balance Report is expected to show a slight widening in the deficit as the pick-up in economic activity is reflected in a pick-up in imports while exports remain somewhat flat.  The trade deficit is  expected to deepen to -$57.9 billion versus -$50.7 billion in June. The best reading over the last year was -$34.6 billion in February as imports stalled with the coming pandemic. The average over the past year is -$45.7 billion so we’re slightly worse than that now, again as exports remain relatively flat and imports climb with the rebounding economy.

Published: 08/31/20 Author: Thomas R. Fitzgerald