Federal Reserve Ramps Up Debate on Taper Timing, Pace Fed officials are set to accelerate deliberations at their meeting next week over how to scale back easy-money policies, amid a stronger economic recovery than they anticipated six months ago.
Fed Chairman Jerome Powell has said their discussions are focusing on two important questions: When to start paring their monthly purchases of $80 billion in Treasury securities and $40 billion in mortgage securities, and how quickly to reduce, or taper, them. (…)
The central bank last December said it would continue the current pace of bond purchases until officials concluded they had achieved “substantial further progress” toward their goals of 2% inflation and robust employment.
“We have not achieved that,” New York Fed President John Williams said July 12.
Because Fed officials have said they would provide ample notice before they start tapering, they look unlikely to initiate any taper at their next two meetings, in July or September.
Instead, if they can agree on a plan this summer, they could provide updated guidance later this summer or at their September meeting on how soon actual reductions might begin. Mr. Powell could also use a speech at the central bank’s annual symposium in Jackson Hole, Wyo., in August to flesh out the latest thinking around emerging plans. That could tee the Fed up to start tapering around year’s end. (…)
One camp that thinks the Fed will need to rai
Economists see continued spending, hiring and limited disruptions as health officials try to avoid restrictions and boost vaccinations
se rates sooner is angling to start the taper as soon as possible. There are good reasons to question “the story that inflation’s going to be temporary and it’s going to get back below the 2% inflation target, which…we won’t know until we get to next spring,” St. Louis Fed President James Bullard said last week. He said he wants to create flexibility “to handle the case where inflation does turn out to be more persistent.”
Another camp thinks recent price pressures will subside and could leave the Fed in the same position it faced for much of the past decade, in which global forces kept inflation below 2% even with historically low interest rates. “I’m still nervous that…it’s going to be tough to meet our inflation objectives,” Charles Evans, president of the Chicago Fed, said last week. (…)
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Delta Variant Isn’t Seen Denting Recovery Economists see continued spending, hiring and limited disruptions as health officials try to avoid restrictions and boost vaccinations
“(…) for now, it seems like the vaccines should be able to keep the spike in cases fairly low.” (…) The uptick [in cases] has touched every state but is primarily occurring in areas with lower vaccination coverage. It hasn’t triggered the widespread closures, layoffs and restrictions on business activity that occurred in the spring of 2020. (…)
Governors and other officials are under pressure to keep their economies open, and vaccinated people could balk at following restrictions intended to keep unvaccinated people safe when Covid-19 vaccines are widely available. (…)
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Data: CSSE at Johns Hopkins University. (Rhode Island and Iowa data from CDC, July 12-19.) Map: Axios Visuals
PENT-UP OR SPENT-UP?
John Mauldin’s team puts itself in the spent spent-up camp, but for the wrong reasons:
Retail sales, other than essentials like food and fuel, plunged last year but recovered quickly. They leaped higher again in early 2021 before stabilizing near the current higher level. Is this sustainable?
Is there some reason to think consumers will keep spending more than they were in 2019 and early 2020? Probably not. More likely, this represents a catch-up effect. People are now making the purchases they postponed last year. It’s the “pent-up demand” we hear about, and for now it is holding steady. But a return to trend seems likely once this effect recedes.
Pantheon Macro’s chart uses monthly, seasonally adjusted annualized data and can thus suggest that recent strong sales are merely catch-ups from the March-April 2020 decline.
The reality is that March and April sales are typically about 4% less than the 10 other months’ average sales. A more adequate way to measure if recent sales are catch-ups is to use non-seasonally adjusted sales for each month and build a trailing 12-month series which this chart does:
The decline in March-April 2020 goods sales was all made up by February 2021. Sales took off thereafter, right when Covid-19 cases dropped and states began reopening their economies. June 2021 trailing 12-m sales were 15% above February 2020 (+11.3% annualized) and are now actually 9.0% above trend.
China Offers Oil Reserves in Unprecedented Move to Cool Rally
The country will supply about 3 million tons — or 22 million barrels — to major refineries, according to people with knowledge of the matter, who asked not to be identified as the information is sensitive. The decision is the latest in a slew of measures by the world’s second-largest economy to rein in skyrocketing costs caused by a post-pandemic economic recovery. (…)
Since early-2021, Beijing has ramped up efforts to control surging prices that have seeped into everything from the cost of power to daily meals. Raw material costs are up on a strong economic recovery from China to the U.S. to Europe, as well as virus-related labor and supply-chain woes. Beijing has gone after speculators and released state metals and coal stockpiles in a bid to prevent rallying prices from denting its own growth.
These sales, however, have garnered mixed responses from the market. Since announcing the sale of stockpiled base metals including copper, aluminum and zinc on June 16, domestic futures prices have been little changed, or risen slightly. For grains, prices are down about 1.5% after China offered stockpiled corn on July 9.
The department in charge of non-oil commodity stockpiles said Wednesday that it will increase the amount of base metals it will sell by as much as 80%, compared with its previous auction, indicating it hasn’t given up its effort to stop the rally. Goldman Sachs Group Inc. and Citigroup Inc. say China’s actions to control prices will likely fail. (…)
EARNINSG WATCH
We now have 73 reports in, an 88% beat rate and a +16.7% surprise factor.
Trailing EPS are now $177.13. Full year 2021: $192.68e. 2022: $213.56e.
But investors are more interested in the conf. calls.
Bespoke’s compilation shows a huge spike in positive guidance…but it puzzles me to see that this comes with rising cuts as well:
(Bespoke)
In spite of this huge spike in positive guidance, Q3 earnings growth are not up all that much, from +24.7% on July 1 to +26.8% yesterday. The biggest upward revisions are in Health Care and Materials. Most other sectors are up marginally while 3 sectors, Cons. Staples, Real Estate and Utes, are seeing their Q3 growth rates shaved.
- About 87% of S&P 500 companies tracked by Bloomberg have mentioned inflation in conference calls so far in July, including some of those mentioned above.
The following were all cited in the latest earnings note from BofA Securities Inc.’s Savita Subramanian (via John Authers) (my emphasis)
Fastenal Co (Industrials): “Price actions to-date have largely matched cost increases. There’s a ton of inflation going on. There’s inflation because of disruption and shipping” “The marketplace is still receptive to price actions and the tools and processes we have developed have been effective. Even so, given the rate of inflation, maintaining price cost parity will be a bigger challenge in the third quarter.”
Conagra Brands Inc. (Staples): “We expect the negative impact of the cost inflation to hit our financials before the beneficial impact of our responsive actions, including our pricing. This timing mismatch is expected to be particularly impactful in (fiscal) H1 and, more specifically, in (fiscal) Q1. The resulting pressure on our first half margins impact our full year profit […]” “When we initially gave our fiscal 2022 targets at our Investor Day in April of 2019, our models assumed an annual inflation rate of around 3%. At the time of our third quarter call, in April of 2021, we expected fiscal 2022 inflation to come in at twice that level around 6% […] We now currently expect fiscal 2022 inflation to come in around 9%.”
McCormick & Co Inc. (Staples): “We’re seeing broad-based inflation across our various commodities, packaging materials and transportation costs. To offset rising costs, we are raising prices where appropriate, but usually there is a lag time associated with pricing, particularly with how quickly costs are escalating. And therefore, most of our actions won’t go into effect until late 2021.”
PepsiCo Inc. (Staples): “We’re seeing inflation in our business across many of our raw ingredients and some of our inputs in labor and freight and everything else. So, we operate in the same context. We feel quite comfortable or confident that through a combination of net revenue management initiatives and increased productivity, we can navigate this.”
Cintas Corp. (Industrials): “While some inflationary pressures increased certain costs, these were more than offset by increased revenue from businesses reopening or increasing capacity as COVID-19 case counts fell and restrictions on businesses were reduced.”
- Bloomberg News also reported this bleak assessment from PPG Industries Inc.: “This inflation cycle is much higher than anyone anticipated and we’re continuing on a business by business basis, working to secure further selling price increases”
Meanwhile, 55 STOXX 600 companies have reported their Q2 results. The beat rate is 55% and the surprise factor on +5.3% with 5 of 9 sectors having reported showing negative surprises. Revenues are only 1.1% above estimates (+4.2% on S&P 500 companies).
Clearly, costs pressures are broad and intense. So far, revenue growth in the 14-16% range helps offset the pressures on margins. But revenue growth is slowing down to +10.0% ex-Energy in Q3 and +6.9% in Q4.
Markit just published a good paper on Suppliers’ Delivery Times, a widely used indicator of supply delays, capacity constraints and price pressures
The suppliers’ delivery times index from IHS Markit’s PMI business surveys captures the extent of supply chain delays in an economy, which in turn acts as a useful barometer of capacity constraints. The index therefore helps gauge the degree to which the current demand/supply environment is indicative of either a buyers’- or sellers’-market, and hence provides valuable information on developing inflation trends.
- The gap between ordering a semiconductor and taking delivery jumped to 19.3 weeks in June, a week and a half longer than in May, according to Susquehanna. The gap was already the longest wait time since they began tracking the data in 2017 and is now more than five weeks longer than the previous peak. (Bloomberg)
