Traders and investors spend their days watching, in addition to general economic trends, price and yield differences between various securities. The spread between 5- and 30-year Treasury securities has held below 1.2 percentage points for almost two months. This lack of volatility, arguably, signals that investors are confident they have correctly assessed the Federal Reserve’s near-term moves on controlling inflation and adjusting asset purchases. Comforting.
The narrative last week was the concern of financial markets over speculation the global recovery will lose momentum as central banks begin to reduce support measures. The Delta variant continues to draw headlines as case counts and hospitalizations are back at recent highs and in some places intensive care beds are at full capacity. While it remains to be seen if this will adjust consumers’ behaviors, some service data, such as seated diners and TSA checkpoint counts, suggest that some services plateaued in July. Retail sales fell 1.1 percent in July as consumers pulled back on goods spending. The shift from spending on goods to spending on services has been expected by many economists although sales data is reported in nominal dollars and not adjusted for inflation in the manner of GDP reporting.
Looking ahead, markets will need to digest news coming from the Fed’s virtual annual symposium where officials are expected to discuss reducing monetary support while avoiding a taper tantrum reminiscent of 2013. Dallas Fed President Kaplan said on Friday that he does not know whether asset purchases are helping the labor market. The Fed speaker calendar is light until later this week when the Kansas City Fed Economic Policy Symposium “Macroeconomic Policy in an Uneven Economy” gets under way in Jackson Hole starting late Thursday with Chair Powell expected to speak on the outlook on Friday morning.
This week’s economic calendar includes updates on Markit PMIs, regional Fed surveys, housing, durable goods, GDP, with PCE to close the week. We are already out of the gate with the Chicago Fed National Activity Index for July (strong at +.53). Later this morning brings August Markit PMIs and July existing home sales. Today’s purchase schedule sees the Desk in for up to $4.4 billion across 30-year 2 percent and 2.5 percent followed by 15-year 1.5 percent and 2 percent. The Desk will release a new two-week purchase schedule Thursday afternoon covering August 27 to September 14. We start the week with Agency MBS prices off a few ticks and the 10-year yielding 1.27 after closing last week at 1.26 percent.
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