Not This One But The Next FOMC Meeting

The FOMC meeting concludes today but we’re not particularly interested in this meeting. Actually, we have our eyes set on the June meeting for the potential that meeting holds. Read on below for our thoughts on why it’s June and not today that may be the pivotal Fed meeting of 2021.  Finally, in our latest podcast we sit down with Eric Corrigan, Senior Managing Director of Commerce Street Capital, to get his thoughts on the  outlook for the post-pandemic M&A playing field. Eric will also offer some suggestions for those contemplating entering the M&A arena.   The iTunes link can be found here and the Spotify link here.

 

 


June FOMC Meeting Is The One To Circle

Let’s talk about the FOMC meeting. Oh, not today’s meeting. That will be a steady-as-she-goes event without any change to policy and without any mention of QE tapering. They will upgrade the economic outlook but it’s still too early, we think, to start twisting the dials on monetary policy, or even begin the discussion of said twists. So when exactly might that be, you ask? Well, I had written earlier that in August at the widely viewed Jackson Hole symposium of global central bankers might be the right time and right spot. On second thought, however, the June FOMC meeting could be possible. Consider the blockbuster March jobs report and April is likely to be as strong, if not stronger. If May follows suit that’s three straight jobs reports with at or near 1.0 million new jobs created per month. You can wave off one report as a one-off but three in a row? Also, the June meeting will bring with it a refreshed economic and rate outlook from the Fed. If the first rate hike is pulled forward into 2023,  which is entirely possible, it’s hard to do that and not begin the tapering discussion as it will precede rate-hikes in the sequencing of policy steps.

 

 

However, don’t be nervous if the QE tapering discussion begins in June. The Powell Fed will lay out a long runway before implementing said tapering. Powell was around for the Bernanke Fed’s Taper Tantrum in 2013 and he doesn’t want a repeat on his watch. They will wait and see how the economy performs in the second half of the year, without the dual adrenaline shots from two fiscal stimulus bills so close together as 2021 opened. If momentum holds up, they may begin tapering in the fourth quarter. If momentum starts to ease, as the market suggests it will, then they will wait to begin tapering in 2022. No matter when, however, the Powell Fed has been good at communicating its reaction function to the market and we think that will be the case again, and thus, don’t fear a Taper Tantrum 2.0.


Copper/Gold Ratio Not Signaling Loss of Economic Momentum Yet

Is the counter-trend rally in Treasuries that has characterized most of  April about to come to an end? We’re not sure but the Copper/Gold Ratio versus the 10-year Treasury yield seems to be signaling that. We’ve been on about the Treasury market’s ability to rally in April despite a string of better-than-expected economic reports headlined by the strong March jobs report that is likely to be followed by an equally strong, if not better, April report. There are tactical reasons for some of the April price action, namely Japan jumping back in after the quiet period leading up to its March 31 fiscal year-end, and shorts getting hung out to dry by the reversal in price action, but the market may also be playing a longer-term strategic bet that second-half 2021 will be less robust once the impact of two fiscal stimulus injections starts to fade from the economic system.

 

As the above graph illustrates the near lockstep movements between copper/gold and 10-Year Treasury yields has broken down since late March and into April. The spike of copper/gold in mid-quarter was subsequently being worked off while Treasury yields resisted the early move, but as you see another spike in copper prices followed as demand has surged again. Copper prices certainly aren’t signaling a loss of economic momentum as we head towards mid-year. While headlines abound about surging COVID cases in India and Brazil, copper prices seem to be signaling that global demand remains strong and if that is the case can Treasury yields continue to resist the pull from both a strong domestic economy and a rebounding global economy? For now, the bet remains in the Treasury market that second half momentum slows. If that isn’t the case, it seems yields have some catching up to do.


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 0.14 0.37 0.71 1.11 2.11 2.57
0.50 0.12 0.34 0.65 1.00 1.97 2.46
1.00 0.12 0.31 0.62 0.96 1.88 2.33
2.00 0.30 0.56 0.88 1.76 NA
3.00 0.83 1.70 NA
4.00 1.65 NA
5.00 1.62 NA
10.00 NA

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Published: 04/27/21 Author: Thomas R. Fitzgerald