Weekly Analysis of Stock/Bond markets.
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Week Ending September 17th, 2021
Major stock indices ended the week modestly lower even after the CPI report showed that inflation moderated in August. Headline and core CPI remains at 5.3% and 4 % respectively on annual basis. Although some of the key contributors to recent inflation pressure, such as used car prices and away from home food services moderated in August but it doesn’t mean that inflation is on a downward trend in the near term. I still believe that inflation will settle in at a much higher level than the levels experienced over last cycle.
I think Fed is going to start the taper before the end of this year and November is still on the table. And as I have been writing for last couple of months that investors should be ready for frequent pullbacks going forward. The direction of the market will depend more on the flavor of economic data releases although it is well understood that Fed is going to stay accommodative for many more months. I think investors are more concerned about earnings growth amid expectation of slow economic growth in the medium term rather than taper.
Let's see what we hear from Federal Reserve this Wednesday.
Week Ending September 10th, 2021
Stock indices pulled back this week on slowing recovery worries. The market participants turned slightly bearish due to weak August payrolls, new signs of rising inflation, very tight labor market and the expectations that Fed is going to start tapering in late November.
I think this small pullback so far only reflects the changing mindset of the market participants and it only represents that participants are reassessing the risks to their future expectations. Buy the Dip camp is also on the 'wait and watch' mode it seems, probably the dip buyers are hoping for a little more downside before they jump back into the market.
Growth scares and small pullbacks are part of the midcycle phase and it is generally believed that midcycle pullbacks are short lived. I don't think majority of the market participants at the moment seem so worried about the start of taper amid expectations of slowing recovery and signs of inflation becoming more stickier than being expected.
Yes investment portfolios need to have some kind of protection going forward and I don't think Bond funds can act as best portfolio stabilizers.
Week Ending September 3rd, 2021
After Jackson Hole, everyone was looking for August jobs report. Non-Farm payrolls grew only by 235,000 in August versus consensus expectations for gain of 700K . The unemployment rate fell to 5.2% while the participation rate remained unchanged at 61.7%. Average hourly earnings rose by 0.6% on monthly basis which confirms the narrative of persistent inflation camp.
The smallest gain in Non-Farm payrolls since January has muddled the picture more. I think this report has shifted the taper timeline to December which is kind of good news for stocks it seems but on the other hand report has added to worries about slow recovery ahead with rising inflation.
I think Federal Reserve is most likely to wait for next couple of jobs reports before it decides to start tapering. Tapering is kind of tightening but it's not going to have major effect on asset prices because Fed has already communicated that rate hikes won't follow tapering immediately. But I think slowing growth and inflation worries are going to cause volatility in the markets in the short term although Fed is going to remain ultra-accommodative for a while.
Given the amount of excessive liquidity in the system, majority of market participants may go on to shrug off all bad news for a little while but I think it is wise to prepare and be ready for the volatility and a possible major pullback ahead.
Week Ending August 29th, 2021
Investors bought the stocks last week as it appeared to most of the participants that mild weakness in the stocks was a good opportunity. Markets looked nervous and traded in a narrow range after last Monday's rally as all were waiting for Powell's remarks. And on FridayPowell gave a calibrated dovish speech which I think is again looking positive for the stocks in the medium term.
It appears that Fed has decided to take chances on inflation as rising inflation still looks transitory to them. In these circumstances I think there is no alternative left except to buy the stocks for the investors. Moreover as Powell suggested on last Friday that rate hikes will not follow the tapering immediately so I think rates are not going to rise at least till last quarter of next year.
It may appear to many that we have wide open road ahead and it's time to push hard on gas pedal now, but I advise investors to be more cautious now as inflation worries are still here and policy mistake seems unavoidable to me.
Week Ending August 20th, 2021
We saw the mild weakness in the markets last week due to the growing consensus that Fed is more likely to start tapering this year and the growing disruptions and lockdowns due to Delta Variant.
All investors are going to look for new clues from the Jerome Powell's speech at the virtual Jackson Hole meeting. I don't think he is going to reveal the taper timeline next week. I think he will double down on the effect of the delta variant on the economy and may point towards the some delay of taper plans.
Federal Reserve may take chance on Inflation for next couple of months in view of the rising covid cases but "no action" by the fed may also cause turmoil in the markets. The bears who are hoping for some correction may need to wait a little longer as some kind of bigger shock in the form of policy mistake is required. Moreover the huge amount of liquidity in the system acts as some kind of shock absorber when markets pull back even a little. But I advise investors not to rely on the 'buy the dip' camp to save every time market pulls back.
Week Ending August 13th, 2021
Stocks shrugged off the fears related to the spread of delta variant last week, it seemed. SP500 AND Dow posted positive week while Nasdaq was almost unchanged for the week.
Bureau of Labor Statistics reported last week that headline CPI rose only by 0.5% in July, a deceleration from June's 0.9% rise while core number rose only by 0.3%. Many of the market participants took this lowest month over month uptick since March as a kind of confirmation of Fed's view of inflation. Transitory camp people may take comfort from the retreat of transitory items such as used car prices and air fares. But I think investors need to understand that anything above 4% on annual and sustained basis is something we all need to worry about.
Moreover Producer Price Index rose by 1% in July and 7.8% on yearly basis as reported last week. I think inflation is here and it is going to be more stickier than expected. And there are fresh signs of supply chain disruptions in view of spread of delta variant.
I advise investors to go into somewhat defensive mode and buy some kind of hedge to overcome any unprecedented outcome. I am not saying a big correction is on the way but the forward path seems more bumpier now.
Week Ending August 6th, 2021
Much awaited July’s jobs report released on Friday, added more to the Federal Reserve’s worries. It was reported on last Friday that total non farm payrolls rose by 943,000 in July and the unemployment rate declined by 0.5% to 5.4%. The labor force participation rate remained little changed at 61.7% . Average hourly earnings rose by 0.4% on monthly basis and the yearly gain stands at 4% now.
It is definitely a good report and confidence booster for investors and federal reserve. But the data for this report was collected in the first half of the last month and before CDC issued new recommendations. I don’t think this surprisingly good report can sway the mind of federal reserve as a group. Fed will more likely wait for 1-2 more jobs reports along with other data sets, before it decides to start tapering. Moreover delta variant is causing another round of disruptions and I think this will slow down the economic recovery definitely at least for 1-3 months but I think the impact will be much less as compared to the first wave.
Markets are expected to trade in narrow range going forward and we will be witnessing pullbacks quite often.
Week Ending July 30th, 2021
It was a mixed week for major stock indices. Stocks pulled back on Friday due to worries about slowing growth and spread of delta variant. Commerce department reported its advance estimate that GDP increased by 6.5% in second quarter, well shy of consensus estimate of 8.5% approximately.
I think markets will trade in narrow range going forward and investors should cut exposure to risky assets a little here and I also recommend using some kind of real hedge. As I am in the “persistent inflation“ camp , I have been hoping for some kind of hint on taper timeline from Fed’s July meeting. But again J Powell stuck to his longstanding view that recent rise in inflation is transitory. Powell also suggested in the press conference that Officials “deepened their deliberations over how and when to start tapering“ and “there is range of views on timing“.
I think there is no consensus in any shape or form among members. I think we have to wait till October this year at least to learn about the taper timeline. And if the inflation continues to surprise on the upside, policy mistake will become more unavoidable.
Fed launched domestic “Standing Repo Facility“ to control level of federal funds rate. This facility will conduct daily overnight repo operations against Treasury securities, agency debt securities and agency mortgage backed securities with maximum operation size of $500 Billion. Fed also launched repo facility for foreign and international monetary authorities. Federal Reserve will enter into overnight repurchase agreements with
Foreign intuitions against their treasury securities maintained in custody of Federal Reserve Bank of New York.
Minimum bid rate for both facilities is set at 25 basis points. The SRF is designed to dampen upward pressure in repo markets that may spill over to fed funds market. I think this facility will also help when Federal Reserve decides to unwind the bonds purchases. In 2014, when Fed stopped its asset purchases, the excessive reserves in the banking system began to shrink and banks were not willing to lend in the repo market. Banks will be able to hold more reserves when Fed decides to taper this time due to the standing repo facility. Moreover banks do not need to guess ample reserves required as banks will have access to SRF all the time.
Week Ending July 23rd, 2021
On last Monday, Dow tumbled more than 700 points intraday. It was a risk off session and it felt like the sell off would continue for couple of days, but all the fears were gone by Tuesday. All news headlines were blaming rising delta variant cases mostly. But I think the market participants have been looking more worried about the inflation, forward path of the monetary policy and peak concerns.
Although the major stock indices have recovered the from the last Monday’s drop and it was a net positive week. The fundamental problems remain the same and I attribute this quick comeback to liquidity provided by the monetary and fiscal policy over the last 12-15 months. This “buy every dip” mentality will remain in place until we see significant shift in the policy.
Federal Reserve’s meeting will take the center stage this week and it is being expected that Fed will provide some kind of hint towards the taper timeline. I think its high time for Fed to pause its monthly purchases by last quarter and start tapering early next year.
Week Ending July 16th, 2021
Major stock indices ended the week lower as the June's CPI report released last week showed that the core CPI jumped 0.9% in June. Core CPI increased by 4.5% on yearly basis, the highest level since 1991. I think June's report renewed the inflation worries and participants have less reasons to believe in the FED's narrative on inflation.
Although there are temporary supply factors responsible for some of the upside surprises in inflation data, and many economists are suggesting not to read too much into the monthly numbers, but the markets look concerned that the rise in inflation may last longer than being expected.
If rising wages start to show up more broadly in the inflation numbers ahead, the Fed will have no excuse not to slam on brakes resulting into a policy mistake. If the "temporary bottlenecks" stay for longer I think the workers will bargain more for higher wages to cover their rising cost of living, and rising wages and prices will keep on feeding on one another.
The US housing market will take the center stage this week with the release of data on housing starts, building permits and existing home sales.
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