Hello. Today we look at the mysterious moves in bond markets amid the Fed’s discussion on reducing asset purchases, the week ahead in global economics and risks to the global outlook from the delta variant.
Taper Talk
In sharp contrast to the worries early this year about a repeat of the 2013 taper tantrum, recent weeks have shown an entirely different market reaction to prospects for the Federal Reserve scaling back its monetary stimulus.
Benchmark 10-year Treasury yields have dropped more than a quarter percentage point since the Fed’s last policy meeting, when the U.S. central bank officially kicked off discussions about the timeline for reducing its asset purchases.
That’s the opposite direction of 2013, when markets took fright at early talk of withdrawal.
Investors and economists alike have been struggling to explain the latest reaction, especially in the face of surging consumer prices. Is the Fed heading for a premature tightening, curbing the recovery? Or are investors expecting a return of the lackluster growth and subdued inflation of the era before the pandemic?
With markets and the economic outlook in flux, Fed Chair Jerome Powell has the chance of weighing in on Wednesday, with his post-policy meeting press conference.
Economists don’t see this being a pivotal meeting — three-quarters of those surveyed by Bloomberg expect the Fed to hold off on signaling a tapering of asset purchases until the Kansas City Fed’s Aug. 26-28 policy retreat in Jackson Hole, Wyoming, or at the Sept. 21-22 meeting of officials.
Even so, Powell’s briefing will be closely watched for any early hints. One focus of discussion this week is likely to be whether to reduce purchases of mortgage bonds on a faster schedule than for Treasuries, Matthew Boesler
reports.The boom in U.S. housing — with the S&P CoreLogic Case-Shiller U.S. National Home Price Index rising the most since at least 1988 in the year through April — has spurred some Fed officials to advocate for an earlier tapering of mortgage-bond purchases.
“The agenda for this next meeting is probably to start hashing out some of the logistics,” said Aneta Markowska, chief financial economist at Jefferies LLC in New York. “On timing, it’s still too early to make decisions, but I think the focus is going to be on those operational details.”
The Week Ahead
In addition to the Fed, investors in the U.S. await a string of key economic data to end the month. Early in the week, reports include those on new home sales and durable goods.
On Thursday, the market will get its first reading of second-quarter growth — to determine if it’s peaked coming off the pandemic lows last year. Figures on personal income and spending are due Friday.
Elsewhere, central bankers in Nigeria, Ghana and Colombia set monetary policy and Hungary’s central bank will likely continue raising interest rates.
For a full rundown of the week ahead, click here.
Today’s Must Reads
- Inflation talk | The White House is shifting the way it talks about inflation, adopting more plain-language explanations from the president himself rather than using terms such as “transitory” to describe trends.
- China outlook | China’s economy continued its stable pace of recovery in July, though there were some some signs of weakness as property sales slumped, small business confidence slipped and the stock market fell.
- Food risks | Extreme weather is slamming crops across the globe, bringing with it the threat of further food inflation at a time costs are already hovering near the highest in a decade and hunger is on the rise.
- Europe’s south | Europe’s southern members — Italy, Spain, Greece and Portugal in particular — can claim the brightest collective outlook since the creation of the euro. The disbursement of 379 billion euros ($446 billion) of recovery-aid will boost their investment spending.
- Ping price | The U.K.’s economy could face a loss of more than 4.6 billion pounds ($6.3 billion) in just four weeks if rules on self-isolation following a “ping” from the NHS app aren’t relaxed, according to data from Centre for Economics and Business Research.
- IP waiver wait | World Trade Organization delegates are planning to depart Geneva for their August break and, in doing so, pause their fractious debate over a proposal to waive intellectual-property protections for Covid-19 shots until the second week of September.
Need-to-Know Research
The rapid spread of the delta variant adds new risks to the global outlook, according to Bloomberg Economics. In North America and Europe, where vaccination programs are well advanced, the threat is of a more drawn out recovery while in Asia, where vaccinations are lagging, renewed lockdowns raise the prospect of a more serious blow to growth, they write.
“Looking further forward, the transition from pandemic to endemic risks a world of lower and more volatile output, and inflation moving through peaks and troughs that have more to do with virus disruptions than unemployment and wage pressure,” writes Chief Economist Tom Orlik.
Bloomberg Terminal clients can read the full research here
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