Let’s taper
August 10, 2021
–Yesterday saw follow-thru from Friday’s strong employment report with a push to slightly higher yields, supported by bearish comments from both Bostic and from Kaplan (the latter in an Odd Lots podcast). Tens rose 2.7 bps to 1.315%. Three year notes are auctioned today with tens to follow on Wednesday and 30’s Thursday. The blue eurodollar pack (4th year) was weakest on the strip, closing -5.5. Greens, the third year, fell 4.125, but it’s worth noting that new recent highs were posted in several red/green one-year calendars. For example, EDU’22/EDU’23 which is the peak point on the curve settled 62, up 2.5 on the day. As noted over the weekend, the high of any one-year calendar in this cycle has been 78 bps, back on April 5 (it was EDM’23/EDM’24).
–The JOLTS data on job openings exceeded 1 million at 1.0073, a new high. This data point relates directly to Kaplan’s interview, where he notes supply and demand imbalances, and specifically cites the labor market. He said that 3 million workers have been lost to retirement (partially related to covid), and that demand across the economy is very strong. He emphasized several times that the economy does not have a DEMAND problem, noting that the Fed is quite good at directly influencing that side of the equation, but that SUPPLY will take a while to come back, and the Fed has much less power there, and for that reason he does not describe inflation as transitory. In fact he said the Dallas Fed sees a broadening of price pressures, which is hurting lower and middle income sectors (this echoes Manchin’s letter that called on Powell to stop QE due to the “inflation tax” that middle America is feeling). Kaplan said his contacts in business were not only raising prices, but were feeling more confident in their ability to increase prices further.
–On the question of taper, he would like it to be sooner rather than later and added that it could be accomplished in about 8 months, though he wanted to make a clear distinction between raising the FF target rate and tapering. He opined that getting the taper done rather quickly might actually forestall having to raise rates. (Is the thinking here that the long end will do the heavy lifting?).
–One other note, I have attached a chart of the deceleration in M2 growth, that some, including David Rosenberg are using as indication of peak growth and inflation. Certainly the money supply is still growing aggressively at 12% yoy, even though the growth rate has fallen from 25%. In any event, at the margin it might tend to remove liquidity that has bolstered both stocks and bonds…..
–Large late buyer of 30k 0EZ 9937/9912ps for 3.0 covered 9954 with 16 delta. Settled 2.75 vs 53.5. Taper done quickly leaves a window for tightening into the end of 2022? August midurves expire Friday. Buyer of 10k 3EQ 9850p for 0.5 (settled 0.25) with EDU’24 9869.0. Looking for a crazy strong CPI tomorrow?
