This past week was another study in contrasts. Federal Reserve Chairman Jerome Powell officially established the “new” Fed last week. While that means low-rates and easy money are here to stay, it also reflects an economy in need of catalysts to heal wounds from the coronavirus. Consumer spending was strong, but confidence in the future wavered. Key data gauges indicate an economy that’s turning the corner, and the Dow joined the major indexes Friday in erasing its 2020 losses. But again, the recovery remains dependent upon the course of the coronavirus.
There’s a lot to get to this week, so we’ll keep this brief and jump into the data.
WALL STREET WRAP
From Jackson Hole, a New Fed: Federal Reserve Chairman Jerome Powell on Thursday laid out a new vision for the central bank during the annual Jackson Hole symposium. Most notably, Powell said the Fed would no longer pursue a hard 2 percent inflation target, instead adopting an “average inflation target” of 2 percent. That means the Fed will let inflation run hotter than 2 percent for “some time” before considering a rate hike to tap the brakes. In a nutshell, “easy” money policies are here to stay.
This marks a sharp departure from the Fed of the 70s and 80s, where fighting inflation was the central bank’s modus operandi. Now, Powell wants to do everything in the bank’s power to nudge inflation higher to avoid deflation. It’s official: Volcker-era has ended, long live the Powell-Yellen era.
If you’ve followed our economic commentaries for the past year and a half, the Fed’s proclamation should come as no surprise. We’ve repeatedly said the Fed would let inflation run higher, rather than risk triggering a recession with a premature rate hike. Ultimately, the Fed hopes this policy shift sets market and economic expectations and aids a labor market recovery.
Spending Today, But Cautious About Tomorrow: Consumers sent mixed, but not necessarily contrary messages, last week. Spending increased more than expected in July, rising 1.9 percent versus 6.2 percent in June. The rate of growth declined month-over-month, but that could be more indicative of a return to more normalized growth levels. Similarly, durable goods orders rose 11.2 percent in July, driven by a 35.6 percent increase in transportation purchases. Consumers were likely capitalizing on low interest rates to get into new cars and trucks.
However, there are big question marks about the future. Consumer confidence dropped to 84.8, a six-year-low, in August. Labor market concerns still linger and are becoming sharper as $600 in additional weekly unemployment aid from the federal government expired July 31. Consumers surveyed indicate it’s harder to get a job, and fewer people expect their income to rise in the near term.
Signs We’re Turning the Corner: The Chicago Fed National Activity Index (CFNAI) hit 1.18 in July, down from a revised high of 5.33 in June. The CFNAI provides a composite read of 85 economic indicators that help us judge the pace of economic growth — any reading above 0 indicates the national economy is expanding faster than its historical rate. For context, the CFNAI hit -17.91 in April and -4.32 in March. April and June were a record low and high, respectively, going back to 1967 when the index began — hinting at the scale of economic disruption. While July’s read fell short of expectations of 3.7, the three-month average is now positive, and that’s a key indicator that the recession is in the rear view.
Reinforcing the return-to-growth theme, the Atlanta Fed’s GDPNow indicates upcoming third-quarter GDP will rise 28.9 percent, as of Aug. 28. GDPNow is a so-called "nowcast" of the official GDP estimate prior to its release. While it’s a purely mathematical estimate, it’s another indication that the economy is turning a corner.
Combating the Virus: Here’s a quick update on progress with coronavirus testing, treatments and vaccines:
- During a speech at the Republican National Convention, President Donald Trump announced a $750 million deal to purchase 150 million rapid COVID-19 tests from Abbott Laboratories. The $5 tests produce results within 15 minutes.
- Convalescent plasma was approved for emergency use on Aug. 23. Plasma, donated from recovered coronavirus patients, is rich with antibodies and may help those fighting the disease. The evidence for its efficacy remains inconclusive.
- According to the New York Times vaccine tracker, there are now 9 vaccines in large-scale, Phase III human trials. The U.S., UK, Japan and the EU have all pre-ordered bulk doses of various vaccines in advance.
THE WEEK AHEAD
Our Routine Manufacturing Check: On Tuesday we’ll dig into the always relevant ISM Manufacturing index. Manufacturing has been on a steady climb upward since lows in spring, and all signs point to that momentum continuing in August. Analysts are expecting a read of 54.5 (any reading above 50 is indicative of growth). Another solid ISM would be another feather in the cap of this recovery, and more evidence that the recession is retreating.
The August Labor Market: The week closes with the monthly unemployment report, and that could be a market-mover as always. We’ve seen weekly initial jobless applications steady in recent weeks, and the unemployment rate is expected to dip to 9.8 percent. Again, the report will offer a deeper glimpse into the types of jobs coming back, who’s getting the jobs and where incomes stand. In this environment, it’s hard to understate the importance of an improving labor market.
Observations from the Fed: As we’ve seen, impacts from the coronavirus are increasingly localized. The rates of transmission differ from one region of the country to the next, and so to the policies and procedures implemented. This week, the Fed releases its Beige Book, which is essentially a collection of boots-on-the-ground, region-by-region observations about the economy. We’ll dig into that report this week to see what we can glean from these anecdotal reports.
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