News: Fed on deck and under pressure — But no taper talk likely this week

Monday, June 14, 2021

Fed on deck and under pressure — But no taper talk likely this week — Stocks should keep popping

Jun 14, 2021

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Quick Fix

Fed on deck — FOMC meets Tuesday and Wednesday after the hot inflation print last week and amid at least some pressure to start to nod toward the idea that not all the price increases are transitory. But don't expect Chair Jay Powell to blink even if the "dot plot" tilts a bit toward the possibility of an initial rate hike next year.

Powell is likely to stick the transitory script as well as attribute much of the pricing pressure to "bottlenecks" in production as the economy turns back on and demand outstrips supply for now. The FOMC itself almost certainly won't make any change to rates or the pace of asset purchases. The dovish stance will likely continue to lift stocks to new highs while keeping Treasury yields low.

Taper ahead? — Via Goldman Sachs: "We do not expect Chair Powell to deliver the first hint at tapering in June. Participants have begun 'talking about talking about tapering,' and some would like to get the process underway sooner in case inflation pressures prove persistent.

"But we think that Powell likely agrees with Governor Brainard and President Williams that the labor market has not yet come far enough. We continue to expect the first hint in August or September, followed by a formal announcement in December and the start of tapering at the beginning of next year"

Pantheon's Ian Shepherdson: "Tapering is going to happen over the next few months; the only questions are when, and at what pace. Markets know this, so investors are playing the parlour game of guessing the date at which the Fed opens the taper talk.

"This matters enormously to large numbers of market players, we appreciate, but at the same time these details are not important from a macro perspective. … The obsession with tapering is a distraction from the real issue, which is whether increased underlying inflation pressure means that the Fed will have to begin raising rates sooner than it currently expects, which is at some point after 2023."

GOOD MONDAY MORNING — Happy Fed Week! Email me on bwhite@politico.com and follow me on Twitter @morningmoneyben. Email Aubree Eliza Weaver on aweaver@politico.com and follow her on Twitter @AubreeEWeaver.

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DRIVING THE WEEK

President Biden is in Brussels from the NATO Summit starting on Monday and will meet with multiple world leaders and hold a press conference … Biden takes part in the U.S.-EU Summit on Tuesday then heads to Geneva, Switzerland on Wednesday for his meeting with Russian President Vladimir Putin and another presser before returning to Washington …

House Financial Services task force has a hearing Tuesday at 10:00 a.m. on "Digitizing the Dollar: Investigating the Technological Infrastructure, Privacy, and Financial Inclusion Implications of Central Bank Digital Currencies" …

FOMC announcement on Wednesday at 2:00 p.m. not expected to include any changes but the dots could shift forward a bit … Powell not expected to suggest any movement on tapering or concern about inflation at his press conference following the statement

NATO PREP — Our Lara Seligman: "NATO allies have made no secret of their frustration with … Biden's decision to withdraw forces from Afghanistan unconditionally by Sept. 11. Now as he arrives in Brussels this week for his first NATO summit as president, Biden must confront allies' lingering resentment over the drawdown and tackle the thorny issues involved in securing the country's future.

"European officials say they are frustrated by what they saw as the Biden administration's failure to sufficiently consult with allies ahead of the announcement, and the decision to move from a conditions-based withdrawal to one based on the calendar. … That disappointment will likely color the discussions this week in Brussels"

SANDERS QUIET ON BIDEN INFRASTRUCTURE MOVES — Our Laura Barrón-López and Natasha Korecki: "As liberals increasingly rebuke … Biden for his ongoing negotiations with a bipartisan group of senators, one prominent progressive lawmaker is staying out of the fray.

"Sen. Bernie Sanders (I-Vt.), the biggest name in national progressive politics, has not expressed concern about clean energy policies not making it into a final infrastructure bill. Nor is he among those loudly criticizing the White House for ongoing talks with GOP lawmakers.

"That's because as a group of Republican and Democratic senators are trying to craft a bipartisan deal, Sanders is working in the background, helping jumpstart the next reconciliation package that seems likely to serve as the fallback option. And the text of that bill has yet to be written."

MERKEL HEADING TO DC — Our Quint Forgey: "German Chancellor Angela Merkel will visit the White House next month, the third foreign leader to meet … Biden in person in Washington since he assumed office earlier this year. The summit, scheduled for July 15, 'will affirm the deep bilateral ties between the United States and Germany,' White House press secretary Jen Psaki said in a statement

"Merkel's meeting with Biden will come after the American president met with Japanese Prime Minister Yoshihide Suga in April and South Korean President Moon Jae-in in May."

Markets

A MEME STOCK IS BORN: HOW TO SPOT THE NEXT REDDIT FAVORITE — Bloomberg's Matt Turner: "Trying to keep up with the frenzied rise of so-called meme stocks might feel a bit like playing a game of whack-a-mole, bewildering analysts and investors alike.

"While there's no steadfast definition of what constitutes a meme stock, one common thread across the many names being pitched on social media is a focus on heavily shorted companies. Shares of Reddit icon GameStop Corp. jumped as much as 2,500 percent in January after day traders noticed its short interest had ballooned to record levels."

SPENDING SURGE MIGHT BE JUST WHAT STOCKS NEED TO HIT NEW HEIGHTS — Bloomberg's Ksenia Galouchko and Kit Rees: "Plans for the biggest corporate spending boom in more than a decade could be the next driver for stock markets trading at record highs. Last year's prudence among companies is giving way to jubilant investment across a swath of industries, driven by economic reopenings, low interest rates and government support.

"Such a signal of confidence in the future is making the likes of JPMorgan Chase & Co., State Street Global Markets and Invesco Ltd. optimistic that equity investors can reap even greater rewards than they're currently enjoying."

MARKETS ARE LEAVING LITTLE ROOM FOR THE FED TO BE WRONG ON INFLATION — WSJ's James Mackintosh: "Investors have faith in the Fed. Over the past three months consumer prices, excluding volatile food and energy, have risen 2 percent, equivalent to a shockingly high annual rate of 8.2 percent. Rather than panic and dump bonds, investors have piled into Treasurys and pushed 10-year yields back down to where they stood in late February.

"Confidence in the central bank is absolute. To be fair, the Fed is probably right: This burst of inflation is probably transitory. The reopening of the economy released a surge of pent-up demand, while supply bottlenecks are restricting production and distribution. As things get back to normal inflation should calm down."

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Fly Around

G-7 SPLIT ON REALLOCATING $100B IMF FUNDS TO COVID-HIT NATIONS — Reuters: "Group of Seven leaders were trying to resolve differences over a proposal to reallocate $100 billion from the International Monetary Fund's warchest to help countries struggling to cope with the COVID-19 crisis.

"An almost final version of the G7 communique seen by Reuters showed Germany and Italy had yet to back the inclusion of the $100 billion figure in the final statement by leaders. The IMF's members agreed in April to a $650 billion increase in IMF's Special Drawing Rights and the G7 countries are considering whether to reallocate $100 billion of their rights to help poor countries fight the COVID pandemic."

GOP GOVERNORS TIE ECONOMY TO RELAXED APPROACH TO COVID — AP's Bill Barrow: "Republican governors running for reelection have begun trumpeting the party's more hands-off approach to the coronavirus pandemic, trying to flip the script on an issue that helped Democrats win the White House and control of Capitol Hill in 2020.

"GOP governors, especially in populous, diverse Sun Belt states, credit a resurgent economy to their resistance to strict public health protocols they frame as shackles. At the same time, Republican challengers are hammering Democratic governors as slow to relax business restrictions, end mask mandates and reopen schools full time."

REGULATORS TELL BANKS IT'S TIME TO STOP USING LIBOR — WSJ's Julia-Ambra Verlaine: "Regulators are ramping up efforts to end Libor trades by year-end. The Commodity Futures Trading Commission last week told brokers that facilitate derivatives trading among large banks that they should stop using Libor, or the London interbank offered rate, as a reference rate by July 26."

RETIRING WORKERS ALTER FED'S CALCULUS ON JOBS SHORTFALL — WSJ's Paul Kiernan: "Federal Reserve officials have long said a key condition for raising interest rates is a return to maximum employment. Their evolving views about how much job growth that will entail could lead them to roll back support for the economy sooner than previously expected.

"Policy makers are likely to discuss when and how to start reducing monthly purchases of bonds, a prelude to eventually raising rates, at a meeting this Tuesday and Wednesday. They have said since December that to justify reducing bond purchases, the economy needed to make 'substantial further progress' toward maximum employment and sustained 2 percent inflation."

TRANSITIONS — Per a Commerce official: "As Sec. Gina Raimondo's portfolio continues to expand within the Biden Administration, the Department of Commerce is adding senior staff to help manage the Agency's work on issues like the economic recovery and infrastructure.

"Liani Balasuriya joins as Executive Secretariat. Jenny Kaplan is the agency's Senior Advisor for Private Sector Engagement, joining from the Greater Washington Partnership. Caitlin Legacki is Senior Advisor for Strategic Communications and Scott Mulhauser has taken a temporary leave from Bully Pulpit Interactive to serve as a Senior Advisor, focused on Raimondo's work in the President's Jobs Cabinet."

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