Capital Markets Update for the Week of 9/20/21

We are almost into the final quarter of the year and the long-term effects of COVID on U.S. businesses are obviously to-be-determined. This week’s FOMC meeting should supply the market with a roadmap for the remainder of the year as far as monetary policy is concerned. Over the past twelve months consumer prices were up 5.3 percent, falling slightly from the prior month’s reading and a possible sign that the pace of yearly change may have peaked this summer. The National Federation of Independent Business’s Small Business Optimism Index revealed a record percentage of businesses reported jobs being difficult in August. Initial jobless claims increased to 332k for the week ending September 11 despite the expiration of enhanced unemployment benefits. The average rate for a 30-year fixed mortgage remains near 3 percent and purchase mortgage apps increased 7.5 percent in the week ending September 10.

On Friday, we saw that retail sales rose 0.7 percent in August when the figure was expected to decline. Inflated prices and child tax credit payments contributed to the headline number. August and September are the back-to-school shopping months and this bodes well for the holiday shopping season at the end of the year. With consumption making up roughly 2/3 of the economy, the positive retail sales number is great news, but the labor market remains a headwind. All the willingness to spend doesn’t matter if the goods aren’t there to begin with. Separately, the preliminary September reading for the University of Michigan Index of Consumer Sentiment increased from August, though it missed expectations as high prices have led to a decline in assessments of buying conditions for homes, vehicles, and household durables. Keep on like that, and it will certainly be a drag on consumption going forward.

Maybe the Fed will eventually move to only replacing assets that pay off early, but the highlight of this week as far as a risk event for the bond market will be the FOMC meeting and Fed Chair Powell’s press conference (taper timing and length will be discussed and an updated SEP and dot plot will be released). Know, however, that there are several economic releases to pay attention to as well. Some highlights are Markit PMI September flashes and over $65 billion of Treasury auctions. Today is rather quiet with just the September NAHB Housing Market Index, which will give a gauge on homebuilder sentiment later this morning. We begin the week with Agency MBS prices better by .250 and the 10-year yielding 1.30 after closing Friday at 1.37 percent on more delta variant economic nervousness.

Market Commentary by Rob Chrisman