The Taper, Inflation, Earnings, and More | Top Three Things to Watch this Week

Tapering, Really?

"A lot of investors live in the present, which is a disaster long term." - Stanley Druckenmiller (h/t @NeckarValue) On Wednesday, the Fed announced a taper of $10bn/month in treasury and $5bn/month in MBS purchases starting this month. But net-net, is the taper going to change supply/demand dynamics in treasuries? For the time being: No While the monetary side is purchasing $10bn/month fewer treasuries, the treasury department is tapering supply by $17bn -- @Barton_options shared a great thread on Twitter. Despite sticky inflation, the Fed released a relatively dovish policy statement that was followed by Fed Chair Powell's press conference. The policy statement mentions aiming "to achieve inflation moderately above 2% for some time so that inflation averages 2% over time." The Fed also left the door open for adjusting the pace of tapering as they see the economy evolve and wait until the rates liftoff is warranted by labor market conditions -- even though the jobs market has already seen substantial progress as highlighted during Friday's NFP report. Nevertheless, the Fed is starting to steer clear of "transitory" in their language. Rather than transitory by itself, the Fed talks about high inflation in terms of "largely reflecting factors that are expected to be transitory," due to supply chain constraints that are dragging on for longer than the committee had anticipated. "We decided to take a step back from transitory to reflect the uncertainty around inflation." - Jay Powell What the Fed describes as "risk management" appears to be working in the eyes of markets. As more participants sweep into risk assets, the Fed is balancing their mandates with the fact that the savings of more people are dependent on financial assets. Drawdowns are met with tremendous accommodation, putting a floor under the market with the 'Fed Put'.

Market participants are now expecting two rate hikes in 2022. The FOMC has said it before and will stick to its guns as long as they can stay behind the curve.

Yields Reacting Lower

Investors find themselves in a spot where sustained inflation forces them into risk assets. When real yields trade below zero, $16-$18 trillion of negative yielding debt globally gets bought, and the cost of borrowing is low, markets will use ample liquidity to allocate it.

Such scenario ultimately expands the Fed's mandate to "protect" investors from losing their invested money; hence why policy responses have gotten more aggressive and faster over the years.

Manheim US Used Vehicle Index (MoM)

The CPI's Used Cars and Trucks component has shown a lag to the Manheim Used Vehicle Index. That would put one of the more transitory components into not so transitory territory. Remember, US vehicle inventory is at extremely low levels and rebuilding will lead to sustained demand for cars.

Used Cars and Trucks CPI (MoM)

Domestic Auto Inventories

Low domestic auto inventories come on the back of continued shutdowns of manufacturing plants and global bottlenecks. Current demand alongside the rebuilding of inventories will take time to resolve itself.

Auto Sales

Source: GoodCarBadCar

This Week's Economic Agenda:

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Job Market Stability

We highlighted it during the last jobs report and it got reflected in the number this time: the labor market is running strong and let's you wonder whether a faster tapering process would be warranted. With 531,000 jobs added to the payroll in October and unemployment edging down to 4.6%, businesses - especially in the service sectors, - are hiring at strong rates.

Again, the Fed is after much more than inflation and the labor market. Their mandate has and increasingly reaches into the fiscal side of things as well as the wellbeing of everyday Americans, who get pushed out the risk curve due to historically low rates.

With a job, not at work, Own Illness - Edging Down

Source: BLS

In addition to a decrease in people with a job but not at work due to ilness, the percentage of people who only work part-time that normally work full-time is also reaching more normal levels (@EconBerger).

Most importantly, though, the rapidness with which this entire process is marching along is continuing to show. Prime-working-age employment is back to 2017 levels after only 1.5 years - far outpacing the recovery on the back of 08/09, - and increases acceptance of lower labor participation for the time being."The revisions to the August jobs number (originally a disappointing 235K, now a reasonable 483K) are a good time to remind ourselves that anytime you are processing economic data don't read too much into it because the data itself might be revised later on." - @jasonfurman

"...employment for August was revised up by 117,000, from +366,000 to +483,000, and the change for September was revised up by 118,000, from +194,000 to +312,000." - BLS

Food for Thought

China Credit Impulse

Source: Bloomberg

China's weak credit impulse leaves a lot of room for economic improvement heading out of 2021 and into the Beijing Winter Olympics in early 2022.

Source: Bloomberg

As global bottlenecks get resolved and global stocks get rebuilt, China's trade balance remains strong and growing.

Who Will Prove Most Vulnerable to the Pullback in Liquidity? - Bridgewater

U.S. Apartment Occupancy in October Stands at an All-Time High of 97.3%