By John Persinos
Welcome to my video presentation for Monday, August 30. The article below provides details.
Sometimes it seems to me that interpreting Federal Reserve statements requires the parsing skills of a Talmudic scholar. To use a Yiddish expression, Fed Chair Jerome Powell just did the stock market a "mitzvah" (a good deed).
At the Federal Reserve's Jackson Hole, Wyoming symposium last week, Powell said what Wall Street wanted to hear: the central bank this year could begin "tapering," i.e. gradually pulling back on asset purchases.
Powell explained that the economy has met the Fed's criteria for progress on economic growth, inflation and employment. He hinted that tapering will begin this year, and in the meantime, indicated that the Fed will stand pat on interest rates.
Powell's remarks were generally interpreted as dovish. Not surprisingly, stocks soared on Friday, with the S&P 500 and NASDAQ setting all-time highs. Stocks finished the week in positive territory.
Oil prices finished the week higher as well, as turmoil in Afghanistan raised the possibility of crude supply disruptions and optimism remained that economic growth would boost energy demand (see table).
The benchmark 10-year U.S. Treasury note dipped in the wake of Powell's remarks. The yield had reached a two-week high of 1.37% on Thursday.
The PCE gets hotter...
In another sign that the economy is humming along, the personal consumption expenditures (PCE) index, the Fed's preferred gauge of U.S. inflation, rose again in July, accelerating at its fastest pace in 30 years.
The Bureau of Economic Analysis reported Friday that the core July PCE Price Index climbed 3.6% on a year-over-year basis, pulling back from its highs posted in June, and 0.3% month-over-month. The numbers were roughly in line with consensus estimates.
The headline PCE index was up 0.4% on the month and 4.2% on the year, the highest since 1990. Personal income rose by a stronger-than-expected 1.1%, while personal spending rose 0.3%.
Read This Story: Your Fed Decoder Ring
The Fed isn't overly concerned about inflation, at least not yet. To borrow a slogan from the first President Bush, we witnessed a "kinder, gentler" Powell in Jackson Hole.
Powell has consistently signaled the Fed's willingness to do what it takes to keep the economy and stock market afloat. The Fed's purchases of bonds have expanded the central bank's balance sheet from roughly $4 trillion before the pandemic to $8.3 trillion.
Powell underscored that tapering would come in advance of any hike in short-term interest rates. Wall Street doesn't expect a Fed rate hike until 2023.
Taper, without the tantrum…
I don't expect a redux of the infamous "taper tantrum" in 2013, when the stock market plunged 5.7% in reaction to the Fed's initial mention of its plans to ease back on bond buying. Powell is intent on remaining prudent.
Powell's stance also helped confirm that the economic recovery is on a solid footing, giving the Fed leeway to tap the brakes (but not stomp on them).
In the coming days, crucial economic data is on the docket that have the power to move markets and steer the direction of stocks for the next few weeks (see table).
Recent data show that consumer confidence has waned, so I'm keeping a particularly close eye on Tuesday's Conference Board report on consumer moods. If negative factors such as COVID Delta prompt consumers to tighten their purse strings, stocks could face rough sledding.
It begs the question: has the stock market reached a peak? I don't think so. The economic recovery is accelerating, the job market is on the mend, the Federal Reserve just indicated that it won't tighten anytime soon, and massive fiscal stimulus in the form of President Biden's $1.2 trillion infrastructure bill is likely to pass Congress in the fall.
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John Persinos is the editorial director of Investing Daily. Send your questions or comments to mailbag@investingdaily.com. To subscribe to John's video channel, click here.
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