Markets Await Fed Chairman’s Comments on Inflation, Quantitative Easing

Let’s go ahead and pull “The Week Ahead” to the lead position because the Federal Reserve and talks of tapering will capture the market narrative and drive trading through the week.

Earlier this month the European Central Bank announced it would purchase bonds at a “moderately lower pace” (back to pre-March levels) through 2021, slightly reducing the scale of support as growth surges in the eurozone. Now, Fed Chairman Jerome Powell is expected to articulate a firmer timeline to reduce emergency asset purchases, or so-called quantitative easing measures (QE). Expect to hear chatter about “tapering” this week, which simply means reducing QE measures. Our deeper analysis of tapering and QE is recommended reading for the week ahead.

The Fed will sort through a mixed bag of higher prices, labor shortages and rising COVID-19 cases impacting the economy to various degrees, with leisure and hospitality bearing the brunt. That’s held down consumer sentiment and created some short-term uncertainty. At the same time, the broader economy — here and in the eurozone — has undeniably staged a comeback despite supply chain logjams and rising materials costs. Growth remains elevated today, albeit not at the breakneck pace set during the earliest stages of the recovery, and we expect that to continue through the year and into 2022.

Powell will likely touch on all of this and more in what’s shaping up to be a pivotal news conference Wednesday.

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Now, to the rest of the weekly.

WALL STREET WRAP

Retail Sales: Retail sales climbed a healthy 0.7 percent in August, though July’s read was revised downward from -1.1 percent to -1.8 percent. Basically, you can call it a push. Still, it’s a sign that consumers aren’t holding back on purchases amid some of the headwinds we outlined above. Many forecasts called for sales to decline; the push was undoubtedly a surprise to the upside.

Sales at restaurants and bars were flat and trailed other industries, but we reiterate: This is evidence that the pandemic is impacting a narrow slice of the overall economy. Also insightful: Auto-related sales slowed 3.6 percent, a welcoming sign from consumers amid a historic rise in auto prices. Declining demand showed up in used auto prices (see below). It’s yet another example of supply and demand pushing and pulling prices closer to an equilibrium and away from extreme highs or lows. We saw the same thing occur with lumber earlier in the year, and that’s likely to replicate in other pockets where prices surged.

Inflation Downshifts in August: Prices rose at a pace lower than what was expected in August, releasing some pressure on inflation fears that have been brewing in markets. The Consumer Price Index rose 0.3 percent, while Core CPI rose just 0.1 percent. That marks the slowest pace of price increases in six months. Though supply chain bottlenecks persist, evidence suggests inflation is largely isolated in certain products or industries rather than something more systemic. Used auto prices, which accounted for a large share of the index’s gains, fell back slightly. Airline and accommodation prices have also fallen back amid coronavirus-related declines in travel.

It’s a timely CPI print for the Fed, as it bolsters the central bank’s position, established months ago, that inflation would prove transitory. Perhaps that provides markets further confidence in Chairman Powell’s forecasts going forward.

Consumer Sentiment Not as Cheery: Consumers’ outlook for September was a bit more sluggish than what August retail sales and CPI might indicate. The University of Michigan Consumer Sentiment Survey rose to 71 for September, up slightly from a 70.3 read in August. Buying sentiment for consumer durable goods fell to a 42-year low, and consumer expectations for inflation remain elevated. According to the survey, consumer hopes for an end to the pandemic this fall have largely been dashed, and that’s contributed to a rise in negative outlooks. However, Richard Curtin, survey director, offered a silver lining in the preliminary report: “In the months ahead, it is likely that consumers will again voice more reasonable expectations and, with control of the Delta variant, shift toward outright optimism.”

THE WEEK AHEAD

For the Week: Refer to the top. Also, we’ll keep an eye on IHS Markit services and manufacturing PMIs for September. Two regional fed manufacturing indices released last week, the Philadelphia Fed’s Business Outlook and the New York Fed’s Empire Manufacturing Index, were incredibly strong. While these are not directly related to the IHS Markit data, expect more signs of strength and resilience in the manufacturing sector amid Delta concerns. We’ll also be watching leading economic indicators, a sprinkling of housing data and more.

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