Wentz Weekly: Federal Open Market Committee Meeting Preview

Wentz Weekly Insights
Federal Open Market Committee Meeting Preview

Fed members have consistently reiterated their message that the short-term increase in inflation will be transitory and ease once covid related impacts – base effects, pent up demand, supply chain shortages, and labor shortages – fade. Last week’s inflation report showed consumer prices rose 5.0% from a year ago, the fastest rate in over a decade, while core prices (stripping out the volatile food and energy categories) rose at the fastest rate since 1992. While much of the index gains were from “temporary” factors, we are seeing signs of “sticky” inflation. Some prices are sticky meanings they may not respond to changing market conditions as quickly as other “flexible” priced goods. The Atlanta Fed attempts to capture the change in sticky prices in its sticky-price consumer price index. The index rose 4.5% on an annualized basis while its flexible index rose 18.7% on an annualized basis.
At the end of the day what matters is how the Fed and the markets interpret inflation expectations. The Fed has maintained its view that the recent rise in inflation will pass and the markets have traded on that expectation. Last week the S&P 500 rose 0.41% to a new record high while the 10-year Treasury yield fell to a low of 1.45%, the lowest since March. The main event this week will be the Fed’s post-meeting announcement and Chairman Powell’s press conference on Wednesday. The meeting will also conclude with an update on the Fed’s projections as well as the “dot plot” – where the Fed sees interest rates in the short and medium term. What we are focusing on is what the new expectation is on inflation and if the Fed will begin discussions on tapering its bond purchase program. We know it will be some time before the Fed starts peeling back the amount of bonds it is purchasing, but for now the bigger question is have they began the discussion on the timing. As of its last meeting, they have not. If the FOMC does, we expect the markets, especially growth, to have an immediate reaction to the downside. Expect volatility toward the latter half of the week.
Last week the Bureau of Labor Statistics released the latest on the consumer price index, a measure of the change in prices paid by consumer for a basket of consumer goods and services. The index showed another large increase in May, rising 0.6% and more than the 0.4% increase expected. Compared to a year ago the index for prices was up 5.0% vs 4.6% expected and up from 4.2% in April. Core prices rose 0.7% after a 0.9% increase in April with the yearly rate at 3.8% up from 3.0% and also above the expectation of 3.4% and the highest y/y rate since 1992. Similar to the April inflation report, used cars made up 1/3 of the monthly gain with used car prices up 7.3% in the month and 30% higher from a year ago. Also significant, every major category in the index was up over 2% from a year ago with the exception of medical costs. Some services are seeing higher prices as well including food away from home (restaurants), rising 4.0% from a year ago versus food at home (groceries) up just 0.7% y/y.
Job openings are at a record high. According to the DOL’s Job Opening and Labor Turnover Survey, as of the last day in May there were 9.28 million job openings, shattering the previous record the month prior by one million and over 30% higher than pre-pandemic levels. Food service firms hold the most job openings currently, followed by “other services,” illustrating the strong snapback in demand for service related jobs thanks to the economic reopening and removal of restrictions. We also take note that the amount of hirings in the month was unchanged at 6.1 million while separations saw a jump higher. Within the separations category, 4.0 million quit their jobs, a record high amount of quits in one month. We believe this suggests employees feel confident they are able to quit their jobs and find a higher paying job. We believe the dynamics of the current jobs market is going to continue to drive the average wage higher, especially at the lower end, which has the ability to affect longer-term inflation. An interesting side note, the number of job openings (9.28 million) is about the same as the number of Americans considered unemployed at 9.31 million.
While Congress remains in deadlock in the U.S. on an infrastructure bill, more specifically over the issue of raising the corporate tax rate, a group of countries have agreed to support a new minimum global tax for corporations. The agreement was made after a meeting between the G7 counties that includes the U.S., Canada, France, Germany, Italy, Japan, and the United Kingdom. A statement following the meeting said the countries support a global minimum tax of 15% on multinational companies and they hope to make further progress on the agreement at the Group of 20 meeting in July. The agreement also has the support of President Biden, who proposed the idea to Republicans as a way to raise additional funds for his infrastructure proposal. A note by Goldman Sachs several weeks ago notes a tax increase on foreign and domestic profits would reduce earnings of S&P 500 companies by about 3% in 2022.

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