For a week with significant geopolitical turmoil and the continued threat of the Delta variant, the bond market was largely unchanged. Yields as across the curve remained range bound as the 10Yr started the week at 1.27% and is currently 1.24%. Both short- and long-term rates acted similar as the 2 Year sits at .21-.22% and long bond (30Yr) dropped 5 basis points from 1.92% down 1.87%. Turning to the equity markets, all three major indices lost a little ground this week coming in approximately 0.3% and 0.5% lower before Friday’s market close which is positive today. Oil prices came lower this week as West Texas Intermediate decreased from $67.29 a barrel to around $63 currently.
Looking at this week’s economic data there was a slew of releases, most of them to the downside. On Monday, the Empire State Manufacturing Index tumbled losing almost all of the gains in prior month’s as it was previously hitting record highs. The index dropped to 18.3 from 43.0 with a median forecast of 29.0 meaning there were expectations of a pullback but not a complete reversal. Investors will look further into manufacturing when the August ISM index is released in early September, it has fallen the last two months. On Tuesday retail sales (including automobiles) dropped -1.1%, the second time in three months as analyst were expecting a drop of only 0.3%. While retail sales are still up 16% in the last year and still exceed pre-pandemic levels, expectations are for it to continue to weaken as the effects of government stimulus and pent-up demand wear-off. Wednesday saw US housing numbers from the National Association of Realtors. Homebuilding fell more than expected as new housing starts fell 7% in July. Housing permits on the other hand did see slight uptick. Also, on Wednesday the FOMC released their July meeting minutes which suggested the tapering of bond purchases could begin as early as late 2021. More on this next week as the FOMC will travel to Jackson Hole, Wyoming for the KC Fed Economic Symposium. Finally, on the positive side of the data releases, Leading indicators (a composite index which forecasts the future direction of the economy) grew in July 0.9% compared to June (0.7%).
Turning to next week’s economic calendar, Monday and Tuesday, US existing and new home sales will be released. On Wednesday durable goods orders will be published as investors continue to get a hold of the business investment outlook. On Thursday, the 2nd Quarter GDP will see the second estimate which currently sits at 6.5% from the initial release. The Fed’s Summary of Economic Projections indicate GDP to be approximately 7% for the year. And on Friday to wrap the week, investors will see personal income, consumer spending, and the University of Michigan Consumer Sentiment index.
Treasury Yields and Taper Talk
The market’s reaction to the Fed discussing tapering was for stocks to decline and Treasuries to remain steady with the long end outperforming. This is in line with prior QE events and market history. An end to prior QE rounds sent yields lower (aside from the short lived Taper Tantrum of 2013) and saw stocks lose momentum as investors reprice expectations of less central bank stimulus and lower growth outlook.
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