Treasuries Bounce Back After Taper Talk Comment

Treasuries Bounce Back After Taper Talk Comment

Treasuries have recouped all the selling that came about off the April FOMC minutes from Wednesday afternoon when the mention that tapering might be discussed at an upcoming meeting. That timeframe upset market sensibilities that thought it more a late summer discussion point. Once the realization hit that the FOMC meeting came when the Fed had only the strong March jobs report, and expectations of an even stronger April report, bids came back into the market. The disappointing April jobs report more than likely delayed any thoughts of taper talk at “an upcoming meeting”  so the headline grabbing remarks were actually rather stale within days of the meeting.  We do, however, delve into the minutes in more detail below, and offer a take that while taper talk may be premature, the Fed’s thoughts on the coming spike in inflation were rather benign. They expected higher prices sure,  but it doesn’t seem they were thinking the April CPI would spike as much as it did. So far they are holding to the “transitory” characterization but one wonders what the next edition of the FOMC minutes will have to say on the subject.

More on the FOMC Minutes

While the Treasury market reacted to the release of the April FOMC minutes on Wednesday with a bit of a sell-off over the comment that tapering discussions may be warranted in upcoming meetings, we differed with that reaction and subsequently the market took back all of the yield backup and more. Here are some reasons we weren’t alarmed over the statement.

• For one, the April 28 meeting  occurred before the disappointing April jobs report. The Fed members only had the strong March report and expectations that April would be just as strong. Recall that Powell in the post-meeting press conference in trying to provide color around the term “substantial improvement” in the economy spoke to a “string” of strong monthly economic reports. The April jobs report definitely broke the string and reset the clock. Thus, the qualifier of the economy continuing to make “rapid progress toward the Committee’s goals” in order to begin talks around tapering took a bit of a hit with the April jobs report. Thus, tapering discussions won’t happen at the June meeting. More likely, the August Jackson Hole global central bank convention looks like the opportune time and venue for talks to be unveiled.

• That then sets the runway for taper to begin most likely in early 2022, with some speculating it would be a taper of $10 billion per month for Treasuries and $5 billion per month for MBS. Currently, $80 billion in Treasuries and $40 billion in MBS are purchased monthly; thus, the tapering could be completed in eight months, or late 2022. That would then set the stage for rate hikes beginning some time in 2023, and that’s assuming no economic hiccups are encountered along the way.

• The other point I want to make about the minutes that I haven’t seen mentioned much in analysis is that while they commented that inflation will spike in coming months, it’s obvious from the levels they were discussing at the meeting they weren’t expecting the magnitude of spikes we saw in the April CPI report. Since that report, however, Fed commentary has resolutely kept to the “transitory” characterization of price increases. It will be interesting if in the next FOMC minutes, there are some hints, or outright concern, over the degree to which inflation rose, as reflected in the CPI reports.

---

Jobless Claims Continue to Move Lower, Bodes Well for May Jobs Report

While the April jobs report disappointed, surprising not only the Fed but most market watchers, the May jobs report should bounce back if the jobless claims data has anything to say about it. The May 15th claims numbers came in below expectations and also set a new pandemic low for the week that is also the survey week for the May jobs report. Initial claims dipped to 444,000. More interesting, perhaps, is the continuing claims series, especially when considering the pandemic-related programs in addition to the traditional state-level insurance programs. The graph below shows the total of all continuing claims (orange line) and claims related to the pandemic programs (white line). The total of all people receiving some form of unemployment assistance is 15.975 million. Of that amount, 11.747 million are in the two pandemic programs. And as that graph shows the numbers under those two programs have remained relatively unchanged since early in the pandemic. However, that total should start to fall as more than 20 states now are suspending federal payments for those pandemic programs. We assume we will see many of those people return to the labor force and start to fill some of the nearly 8 million positions that the JOLTS report lists as open and available.

 

---

Lumber Prices Starting to Correct Lower

One of the big topics in the inflation story has been the meteoric climb of lumber prices and the impact it’s had on stalling some building in the residential housing market. As lumber prices were setting daily highs in April, reports started to circulate that builders were starting to pull back on building due to the cost issues. We even saw that in the latest housing starts numbers for April where starts declined 9.5% from March’s lofty numbers. That modest pullback in activity also had an impact on lumber prices as shown in the graph. After peaking at $1,733 on May 10th, the contract dipped 31% over the next nine days. There’s been a bit of a bounce but the price action does serve to remind that higher prices for discretionary items can have its limits. At a certain point demand weakens and prices react, accordingly.

 

---

Market Rates