US equities rebound as Powell talks dovish
US stocks are stabilizing as investors are clearly in wait-and-see mode over the current wave of inflationary pressures. Equities have quickly bounced back from last week’s Fed-induced selloff as investors quickly realize interest rates will not move anytime soon. Policymakers might announce tapering at the end of the summer, with tapering starting in January, which means rate hikes won’t happen until 2023. Expectations for infrastructure spending are high, so stocks appear to have a short-term safety net in place.
The US economy is hitting peak growth and that could extend a lot more depending on how infrastructure spending talks unfold. The big question on Wall Street’s mind is how much more stimulus the economy will get with Biden’s infrastructure spending deal. A bipartisan deal will mean much less support but probably less inflationary pressures.
Fed Speak
The next round of Fed speak did not exactly follow Fed Chair Powell’s lead in downplaying inflationary fears. Fed’s Bowman speech on building economic resilience in communities were rather hawkish on prices but dovish on employment. She noted that inflation has increased and will likely increase further. Bowman added that upward price pressures may ease as the bottlenecks are worked out, but it could take some time. Bowman added that over 10 million people are still without jobs, with leisure and hospitality still down 3 million jobs since February 2020.
The Fed is still far away from substantial progress with the labor market, so Wall Street should not expect any tapering announcement until after summer is over.
US Data
The June flash reading for manufacturing in June posted another record high as the unprecedented growth spurt continues. Service sector growth disappointed and fell to a two-month low. Investors mostly focused on pricing pressures, which were elevated but showed some signs of easing. The service PMI reading’s pricing pressures fell from 66.1 to 64.9, while the manufacturing pricing gauge rose from 78.1 to 78.3, the highest reading since the series began. This round of PMI data shows the US economy is running hot but possibly peaking.
The housing market continues to cool after the May reading of new home sales dropped to 769,000, a big miss of the 865,000 consensus estimate. The drop in new sales matches the decline with mortgage applications. The prior three months of sales were also revised lower by 108,000. The bright spot of the economy is losing its luster and the normalization of the housing market will likely continue going forward. Prices remain elevated and that seems to be a consistent driver for persistent inflationary arguments.
Bitcoin
Bitcoin bulls have defended the USD29,000 level and now the healthy consolidation can continue. Bitcoin will take months to rectify the shift of mining out of China and showing progress over addressing environmental concerns. Bitcoin’s back was almost broken, and it could have happened if Wall Street grew seriously nervous over a sooner-than-expected taper tantrum. The crypto crash that started in mid-May across all the other coins will likely warrant a consolidation of the cryptoverse, which should be good news for ethereum and bitcoin.