Fri, Oct 22, 2021 @ 01:14 GMT
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Weekly Focus – Fed Members Speak Openly about Tapering

The Delta variant is spreading fast in most of Asia and in a number US states in the southern part of the country. Asia is challenged by a lower vaccine coverage. Sydney has remained in lockdown for two months, yet the infection figures continue rising; Australia’s vaccine coverage remains low with less than 19% of the population fully vaccinated. A similar story is playing out in Japan where Tokyo’s coronavirus advisory panel said that the situation is getting out of control. China stands out in this sense, as the country’s zero-tolerance policy for Covid is getting increasingly challenged. Despite mass testing and regional lockdowns, new infections continue rising, although the figures remain very low compared to US, for example. In the US, Florida and Texas are the hotspots with new cases and hospitalisations at record levels in the former state. In other big states like New York and California, the problems are less pronounced.  New cases in most European countries continue to fall as the countries keep rolling out vaccines and selective restrictions have worked.

This week, many Fed members came on the wire with their views on the upcoming tapering of the Fed’s QE programme. In general it now seems more a matter of when than if there will be tapering. Fed governors seem a bit divided on the timing of launching the tapering. It seems consensus is emerging on starting tapering later this year or early next year, in line with our view, and that the first rate hike could come in early 2023 although some Fed members have mentioned late 2022 (which is also our view). The more hawkish line follows the line taken at the July meeting (see our review of that meeting: Fed Research: Review – Another step towards less accommodative monetary policy). Chairman Powell is due to speak on Tuesday, and Fed minutes from the July meeting on Wednesday next week will likely give more indication of the thinking inside the Fed on the coming monetary tightening. The Jackson Hole conference on 26-28 August also looks crucial in this regard.

Monthly CPI US inflation pressures fell back in July in line with the market and Fed’s narrative that the current spike in inflation is transitory. Both the core and headline inflation measures declined to 0.5% on a monthly basis in July from about 1% in June. Prices for items like used car prices led to weaker inflation pressures. Next week we get the final euro area inflation print for July, which will be very interesting in judging the underlying inflation pressures in the euro area and the size of the transitory drivers.

The Fed comments on likely tapering start weighed on US Treasuries, and 10Y yields rose above 1.30 % for the first time since mid-July. The higher US yields lent support to the USD, with EUR/USD falling to around 1.17.  Commodity prices came under pressure as the resurgence of the virus and travel restrictions in China were seen as a threat to the demand outlook. However, oil prices rebounded later in the week in line with broader commodity markets. Amid a strong earnings season and low yields, equity markets ignored the virus problems and edged to record levels in the US.

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