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AM Notes: Transitory taper talk

AM Notes: Transitory taper talk

Powell was on top form last night, batting away every question with ease...

TL;DR 👇

"You think we're going to talk about tapering while there are still 8.5 million unemployed and all of the inflation concerns are due to TRANSITORY supply chain bottlenecks?

You guys crack me up!"

"We're just going to need to see more data. It's not more complicated than that."

It really seems that a lot of market commentators haven't understood AIT, and markets are still pricing strong odds of the first hike in December 2022...

It could happen, providing everything goes EXTREMELY smoothly but that's a VERY high bar.

The Fed will see two NFP reports before the next meeting and pressure will undoubtedly grow to define 'substantial progress'...

How will Powell respond?

"Can't read my No, he can't read my poker face"

The June meeting is likely too soon for the Fed to commit to a path, even though Powell has promised to give markets plenty of warning about tapering...

There are currently 8.4 million jobs to recover

Think about it this way, even if both NFP prints are in the region of one million jobs added, that still leaves over 6 million unemployed...

Let's imagine this view from JPM is correct 👇

“If the US economy continues to rebound strongly in line with our forecast, then another two months of better data may get the Fed to start talking about talking about tapering at its June meeting.” JP Morgan

What kind of message does it send if the Fed talk about tightening so early in the recovery?

A strong labour market is KEY to the Fed's Average Inflation Targeting policy...

If there is slack in the economy (and by extension the labour market), then inflationary pressures will subside rather than sustain...

Supply chain bottlenecks will ease at some point...

More informed people than I say that it will be Q3 or Q4 at the earliest

Ford sees the chip shortage extending into 2022...

The global chip shortage is going from bad to worse with automakers on three continents joining tech giants Apple Inc. and Samsung Electronics Co. in flagging production cuts and lost revenue from the crisis.

In quick succession, Honda Motor Co. said it will halt production at three plants in Japan for around five to six days next month; BMW AG flagged it will pause Mini car production at its Oxford, England, factory for three days; and Ford Motor Co. reduced its full-year earnings forecast due to the debilitating chip shortage, which it now sees extending into next year.

And now, the very companies that benefitted from surging demand for phones, laptops and electronics during the pandemic that caused the chip shortage, are starting to feel the pinch.

After a blockbuster second quarter, Apple Chief Financial Officer Luca Maestri warned that supply constraints are crimping sales of iPads and Macs, two products that performed especially well during lockdowns. Maestri said this will knock $3 billion to $4 billion off revenue during the fiscal third quarter.

We can extend this uncertainty across all industries...

When will raw material costs normalise?
When will supply chains normalise?
How can companies commit to long term decisions while this uncertainty persists?

What does that mean for their hiring intentions?

Repeating, a strong labour market is at the heart of the Fed's FAIT policy

How is it supportive of their goals if they tighten financial conditions while so much uncertainty remains?

At this stage, talking about tightening at Jackson Hole in August looks optimistic...

By November, the Fed will have actual data to work with, unemployment support will have expired and a clearer view of supply chains and shortages should be emerging...

The Barclays view sounds far more reasonable 👇

"We retain our view on the outlook for monetary policy: we expect the FOMC to announce at its November meeting that the tapering of asset purchases will begin in January of next year.” Barclays

As for rate hikes starting in 2022, let's bring out this classic...