In his Daily Market Notes report to investors, while commenting on the supply chain backups, Louis Navellier wrote:
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The 10-year Treasury bond yield declined a bit during the Afghanistan crisis, so all eyes are now on the Fed to see how new realities will impact monetary policy. Frankly, I don’t think the Fed will curtail quantitative easing (QE) until 2022.
Infighting at FOMC
The Fed released its last FOMC minutes on Wednesday. Those notes revealed a disagreement within the FOMC. Those notes revealed a disagreement within the FOMC about when the Fed will begin tapering its quantitative easing.
My conclusion from all this infighting, as reflected in the FOMC minutes, is that the Fed will try to placate “most participants” by saying “it could be appropriate to start reducing the pace of asset purchases this year.” Translated from Fedspeak, this means that the Fed may announce tapering at its September or December FOMC meetings, but the tapering won’t commence until 2022. I may be wrong, but I am betting that any tapering will commence in 2022 and even then the Fed will merely downshift from $120 billion to $80 billion per month in easing rather than ending QE altogether in a “cold turkey” cessation.
Fed Chairman Jerome Powell offered no monetary policy clues at his virtual “town hall” on Tuesday, but he said, “It’s not yet clear whether the Delta strain will have important effects on the economy; we’ll have to see about that.” In other words, Powell retains a vague and uncertain economic outlook, so I expect that Fed policy will remain unchanged and that any tapering decision will be kicked further down the road.
The most interesting comments from a Fed official last week came from Minneapolis Fed President, Neil Kashkari, who spoke last Tuesday at the Pacific Northwest Economic Regional Annual Summit in Big Sky, Montana. Kashkari, who implemented the TARP programs during the 2008 financial crisis, said, “Cryptocurrency is 95% fraud, hype, noise and confusion.” Interestingly, the Fed has declared bitcoin and other cryptocurrencies as “not legal tender” while the Treasury Department has declared cryptocurrencies as “an asset,” so on your 2020 tax return, you are required to declare your cryptocurrency transactions. Clearly, these regulators disagree.
Most Economic Indicators Argue for Continued Fed “Easing.” Adding to the conundrum, the latest data from the TSA pointed to a 10% drop in people moving through airport checkpoints, while OpenTable cites a decline in restaurant reservations, with many live events being canceled in California and around the nation. Most airline, cruise line, hotel, casino, live event, casino, and restaurant stocks are in full retreat, with several knifing through their 200-day MAs. This reflects consumers dialing back expectations, at least for now.
The biggest shock came on Tuesday, when the Commerce Department reported that retail sales declined 1.1% in July. However, there was quite a bit of good news buried in the details of the report: First, retail sales in June were revised up to a 0.7% increase, and July’s weakness was partly due to a 3.9% drop in vehicle sales, mostly due to the semiconductor chip shortage. In addition, Amazon’s Prime Day in June bloated June’s totals, distorting the July totals in the month-to-month comparisons. And finally, spending at bars and restaurants in July rose by a robust 1.7%, which is very positive, as it signals that consumers were “out and about” in July. In the past 12 months, retail sales have risen 15.8%.
Consumer Spending Rises In July
Citing another positive in retail sales, The Wall Street Journal reported that a MasterCard tracker of consumer spending, excluding vehicle sales and gas stations, rose approximately 11% in July compared to July 2020. MasterCard also reported that in the past 12 months, spending on apparel and jewelry surged 80%, while restaurant revenues rose 61%. Based on these consumer spending patterns, it appears that consumers are getting out, so the Covid-19 Delta variant did not curtail consumer spending in July.
On Wednesday, the Commerce Department announced that new housing starts declined 7% in July to an annual pace of 1.534 million. On the other side of the coin, building permits rose 2.6% in July to an annual pace of 1.635 million. Builders continue to cite frustrations with supply chain issues and higher material prices, but as long as there is a low inventory of homes for sale and rising median prices, I expect that most homebuilders will continue to post record profits.
Supply Chain Backups
I should add that China’s National Bureau of Statistics reported this week that retail sales decelerated to an 8.5% gain in July. There is a growing concern that China’s strict Covid restrictions may impact economic growth after China recently shut down all inbound and outbound services at its Meishan terminal at its Zhoushan port, due to a Covid-19 outbreak. The Zhoushan port is the third busiest port in the world. It specializes in shipping containers that go predominantly to Europe and the U.S. This shutdown will further exacerbate supply chain backups and price inflation. This marks the second time this year that the Zhoushan port had to be closed under China’s “zero tolerance” policy.
Finally, there continues to be improvement on the jobs front, since the Labor Department announced on Thursday that initial unemployment claims declined to 348,000 in the latest week. Continuing unemployment claims declined to 2.82 million in the latest week. This represents the fourth straight week that new jobless claims declined. Prior to the pandemic, weekly jobless claims averaged slightly more than 200,000 per week, so although the labor market is improving, the pandemic damage remains high.
From December 1936 through June 2021 the average quarterly yield for the S&P 500 was 3.548%. The current 5-year average is 1.869% and the current 10-year average is 1.958%. The current 12-month dividend yield is 1.3465%. Wow. SPX dividends used to be a lot higher. Source: S&P Dow Jones Indices.