Month: July 2021

Fed Says Economy Has Progressed Toward Goals, Tees Up Bond Taper Officials will assess whether to begin shrinking their $120 billion in monthly asset purchases in coming meetings

(…) Officials said in a statement Wednesday, at the conclusion of their two-day meeting, that “the economy has made progress toward these goals” and that progress would be assessed in coming meetings.

That is a clue the Fed could announce plans to start reducing, or tapering, the purchases, later this year. The central bank’s next meetings are scheduled for Sept. 21-22 and Nov. 2-3.

Fed Chairman Jerome Powell said at a virtual news conference Wednesday that the central bank was nowhere near considering plans to raise interest rates. “It’s not something that is on our radar screen right now,” he said. (…)

Mr. Powell said that while the variant could lead to significant public health problems, higher rates of vaccination and greater improvisation by consumers and businesses suggest “we’ve kind of learned to live with” the virus. (…)

While officials want to see more hiring before pulling back on bond buying, “there’s a range of views on what timing will be appropriate,” he said. (…)

Mr. Powell said the Fed was likely to start reducing purchases of both types of assets at the same time, adding it was also possible officials could decide to taper the mortgage-bond acquisitions somewhat faster than Treasurys. (…)

Mr. Powell stuck to his longstanding view that recent surges in inflation are likely to fade over time. (…) “There’s absolutely no sense of panic,” Mr. Powell said. “My best estimate is that this is something that will pass…But we’re actually responsible for this, though, so we have to take seriously the risk case, which is that inflation will be more persistent.” (…)

What the Fed now faces “is a different thing,” said Mr. Powell. The economy’s ability to supply goods and services “is not able to handle this big spike in demand that we’re seeing.” (…)

ING:

US Federal Reserve Chair, Jay Powell, says the US has made progress, but not “substantial further progress” towards attaining the goals that will allow for a taper. But he expects to discuss that progress further over coming meetings – so more than one meeting, two then? That basically takes us to December. Just as the market was expecting.

Goldman Sachs:

The July FOMC meeting offered little new information. The FOMC added language to its post-meeting statement noting that “the economy has made progress toward” its employment and inflation goals since December, but this likely arose as a compromise among participants and was balanced by language noting that the FOMC “will continue to assess progress in coming meetings.” In addition, Chair Powell said that the labor market still has “a ways to go” and “some ground to cover,” and that “we’re some way away from having had substantial further progress.”

We continue to expect the taper countdown to start with a first warning at the September FOMC meeting that leads up to a formal announcement at the December meeting. We see a 20% probability that the formal announcement will come in November, a 55% probability that it will come in December, and a 25% probability that it will come after the end of this year.

• Not Even Jerome Powell Gets What’s Up With the Bond Market

(…) “We’ve seen long-term yields come down significantly,” Powell said at a press conference following the central bank’s latest policy meeting. “I don’t think that there’s a real consensus on what explains the moves between the last meeting and this meeting.” (…)

Powell did cite three possible explanations for the recent decline. Some of it was driven by a decline in real yields as the spread of the delta variant raised investors’ concern about a growth slowdown. Meanwhile, investors’ inflation expectations have moderated. And finally, there are the so-called technical factors — “where you put things that you can’t quite explain,” he said. (…)

• The Federal Reserve’s Big Inflation Miss If you bet on the central bank’s price forecasts, you lost.

The WSJ editorial board:

(…) Fed Chairman Jerome Powell conceded at his press conference Wednesday that prices had caught the central bank by surprise, but he showed no particular concern. The Federal Open Market Committee’s statement Wednesday after its two-day meeting also showed little interest in reeling in what has been the most reckless monetary policy since Arthur Burns roamed the Eccles Building. History hasn’t been kind to Burns. (…)

The Fed is way behind the price curve. Price increases would have to decline precipitously in the next six months to get close to the Fed’s median June forecast of 3.4% for 2021, much less its 2% inflation target. (…)

You don’t have to be a cynic to wonder if the Fed privately now wants more inflation to ease that rising debt burden. The progressive intelligentsia is already making that case. (…)

One trait of the modern Fed is never to take responsibility for financial and economic problems. The financial panic of 2008 was the bankers’ fault. The historically slow expansion after 2009 was the fault of fiscal policy. Now the inflation surge is due to forces beyond its control. If the Powell Fed won’t even accept responsibility for the price level, which is central to the Fed’s mission, maybe it’s time for a Fed Chairman who will.

States that cut unemployment early aren’t seeing a hiring boom, but who gets hired is changing States that scaled back unemployment aid have seen a decline in teen employment and an increase in workers over 25, early evidence finds

(…) A new analysis by payroll processor Gusto, provided to The Washington Post, found that small restaurants and hospitality businesses in states such as Missouri, which ended the extra unemployment benefits early, saw a jump in hiring of workers over age 25. The uptick in hiring of older workers was roughly offset by the slower hiring of teens in these states. In contrast, restaurants and hospitality businesses in states such as Kansas, where the full benefits remain, have been hiring a lot more teenagers who are less experienced and less likely to qualify for unemployment aid.

The findings suggest hiring is likely to remain difficult for some time, especially in the lower-paying hospitality sector. The analysis also adds perspective to the teen hiring boom, revealing that more generous unemployment payments played a role in keeping more experienced workers on the sidelines, forcing employers to turn to younger workers. It indicates teen hiring could slow further in September, as unemployment benefits are reduced across the country and young people return to school. (…)

So far, early data suggests that cutting the benefits given to Americans who lost their jobs during the covid-19 pandemic has not led to a big pickup in hiring. The 20 states that reduced benefits in June had the same pace of hiring as the mostly Democrat-led states that kept the extra $300-a-week unemployment payments in place, according to state-level data from the Labor Department. Survey data from the Census Bureau and Gusto’s small-business payroll data show similar results. (…)

Inflation Ticks Down to 3.1% in ‘Relief’ for Bank of Canada

The consumer price index was up 3.1% in June from a year earlier, Statistics Canada reported Wednesday in Ottawa, broadly in line with the 3.2% increase economists were predicting in a Bloomberg survey.

A slowdown from the 3.6% gain in May, the reading exceeds the Bank of Canada’s 1% to 3% control range for inflation, but the more muted price increases support the bank’s argument that the run-up is transitory. Still, policy makers expect inflation to creep to an average of 3.9% in the third quarter, a level not seen since the early 2000s. (…)

On a monthly basis, prices rose 0.3% versus an estimate of 0.4%. The average of core inflation measures — often seen as better gauge of underlying price pressures — was 2.23%, little changed from May.

June’s inflation rate was largely driven by higher transportation and housing costs, reflecting continued strength in rental and new home prices. Shelter costs rose 4.4% on a yearly basis, the fastest increase since 2008. Supply-chain bottlenecks are also pushing up prices for hard goods likes cars and household appliances, which have been affected by a global shortage in semiconductor chips. (…)

China Moves to Reassure Investors After Market Rout Securities regulator says future policies will be introduced more cautiously to avoid market volatility

(…) Mr. Fang told those present that China’s recent regulatory crackdowns on companies engaged in private tutoring, online financial services and other sectors are aimed at addressing problems in those industries and helping them grow in a proper manner, the people said. He also said China has no intention to decouple from global markets, and especially from the U.S., the people added. (…)

Wednesday’s private reassurances came a day after Vice Premier Liu He told a gathering of small businesses that China was trying to balance development and security. He said doing so meant protecting competition and consumers, and this would be good for smaller companies—a message some analysts took as showing that China wasn’t trying to crush the private sector. (…)

The government is reviewing so-called variable interest entities—a structure many Chinese companies have used to raise funds offshore—but it sees VIEs as a necessary and vital part of how Chinese firms engage with global markets, Mr. Fang said, according to the people.

The regulator also said China’s Communist Party is eager to protect the interests of private companies and international investors, and the government is planning to introduce more policies to attract foreign investment, the people added. (…)

Those soothing comments come after the China Tech universe has lost $410 billion of market value only in the last 2 weeks, crowning a $1.2tn collapse since February per Goldman Sachs numbers. GS concludes that “ the Chinese authorities are prioritizing social welfare and wealth redistribution over capital markets (…) consistent with their repeated emphasis of promoting fair growth and “broad prosperity” since late last year.”

The analysis then attempts to assess fair values to the Chinese market:

The resulting fair values range from +23% in our Optimistic case (a near-term disruption) to -25% in a bearish scenario where the profitability of POEs converges to SOEs’. The wide-ranging outcomes imply significant short-term market volatility (and low Sharpe ratios) as investors stress-test and reprice their regulation expectations.

Bloomberg’s Justina Lee, a former China markets reporter:

(…) Anyhow, even with the reassurances, the takeaway for overseas investors is clear: It’s hard to know what you’re getting into with Chinese assets. And between the current Chinese regime’s laser-sharp focus on political control and its intention to control financial risks, more shocks are likely to come.

SPAC, CACKLE AND FLOP!

Almost Daily Grant’s:

ATI Physical Therapy, Inc. (ATIP on the NYSE), the country’s largest outpatient provider, had an unpleasant surprise earlier this week.  In its first quarterly earnings announcement since going public last month via a merger with a blank check firm, ATI slashed its full-year 2021 guidance to $655 million in revenue and $65 million in adjusted Ebitda (using the midpoint of the provided ranges), down from previous projections of $731 and $119 million, respectively. 

Management blamed heavier than-expected staff attrition rates in tandem with “intensifying competition for clinicians in the labor market” for the shortfall, but noted that demand remains brisk and promised “a range of actions related to compensation, staffing levels and other items” to remedy the situation.  Mr. Market was unimpressed, sending shares on a 54%, two-day swan-dive.

That emphatic decline caught Wall Street off guard, as each of the five sell-side firms covering the company had rated shares “buy” or “outperform” prior to Monday’s thunderbolt.  Analysts at Barrington Research, who promptly downgraded their assessment of ATI to “market perform,” identified some less than-reassuring details beyond the lackluster outlook: 

“The company chose to release its results before it had been able to calculate income tax expense. As a result, the earnings release lacked an EPS figure. The release also lacked a share count, a balance sheet, a cash flow statement or, for that matter, a good defense for why the company’s original guidance (which was maintained up until Monday) ever made sense. 

We are shocked by what has unfolded at ATI.”

ATI’s beeline to the public market colors its current predicament.  The rehabilitation outfit agreed to merge with special purpose acquisition firm Fortress Value Acquisition Corp. II in February, a transaction completed six weeks ago. 

(…) ATI’s February investor presentation penciled in $1.24 billion in revenue and $268 million in adjusted Ebitda for 2025, up from $785 million and $128 million, respectively, before the bug bit in 2019. 

Of course, those figures are downright conservative compared to the pie-in-the-sky projections seen in other corners of the SPAC “space.”  An April analysis from the Financial Times showed that nine blank check-backed electric vehicle-related companies that came to market last year projected an aggregate $26 billion in revenues in 2024, representing a 270% compound annual growth rate from the $139 million aggregate top line achieved last year.

More to come given that

Some 421 blank check firms that have come public since the start of 2020 are still looking for an acquisition dance partner according to data from Spacinsider.com, more than two thirds of the 632 SPACs which have come public over that period.