Month-In-Review: June 2021

The U.S. economy continued to gain momentum at the end of the second quarter. As vaccination rates climbed, the reopening of the economy accelerated with workers and shoppers welcomed back. Expectations for growth, meanwhile, continued to rise with forecasts for Q2 GDP over 9%, surpassing the 6.4% gain at the start of the year, and adding fuel to an already roaring equity market. The S&P 500 specifically rose 14.4% in the first half of the year, marking the second biggest six-month gain since 1998. Policy officials, meanwhile, remained hesitant to roll back support without indications of “substantial further progress," ushering yields lower. After rising to a recent high of 1.74% in March, the 10-year yield fell 31bps to a low of 1.43% on June 10th before ending the month at 1.47%. 

Market Activity and Commodities

·      Equities – Equities ended mixed in June for the second consecutive month. Beginning at 4,204.11, the S&P 500 advanced 2.2% in June, closing at 4,297.50, marking its fifth straight month of gains. The Dow, however, slipped 0.1% at the end of Q2 from 34,529.45 to 34,502.51. On the other hand, the Nasdaq increased 5.5% in June, closing at 14,503.95. In the first-half of 2021, the Dow rose 12.7%, the S&P 500 surged 14.4%, and the Nasdaq increased 12.5%, marking the best six months of gains to start a year since 2019.

·      Treasuries – Treasury yields ended mixed in June, after finishing lower in May. The 10-yr Treasury yield dropped 13bps from 1.60% to 1.47% at the end of Q2. The 2-yr Treasury yield, meanwhile, ended June up 11bps at 0.25%. Since the start of 2020, the 2-yr dropped 132bps and the 10-year declined 42bps.

·      Oil      

o  (Jun 1) – OPEC+ met via videoconference to discuss current oil market conditions and a potential price “maneuver." The group attempted to balance expectations of a recovery in demand against a potential increase in supply from Iran. Iran is the world's fourth-largest crude producer at about 2.5m barrels a day. Recall in April, OPEC+ opted to increase daily production by 2.1 million barrels in anticipation of rising global demand as economies around the world began to reopen. Oil prices rose 3.5% to trade at $68.66 a barrel following the meeting.

National Growth and Outlook

·      NFIB Small Business Optimism (Jun 8) – The NFIB Small Business Optimism Index unexpectedly declined from 99.8 to a reading of 99.6 in May, a two-month low. According to Bloomberg, the index was expected to increase to 101.0.

·      Leading Index (Jun 17) – The Leading Index rose 1.3% in May, as expected, according to Bloomberg and followed a similar gain in April.

·      Chicago Fed National Activity Index (Jun 21) – The Chicago Fed National Activity Index rose from -0.09, revised down from 0.24, to a reading of 0.29 in May. According to Bloomberg, the index was expected to rise to a reading of 0.70 in May. The Chicago Fed National Index draws on 85 economic indicators; a reading below zero indicates below-trend growth in the national economy and a sign of easing pressures on future inflation. In May, 55 of the 85 monthly individual indicators made positive contributions, while 30 made negative contributions.

·      GDP (Jun 24) – GDP was unrevised at a 6.4% gain on an annualized basis in the final Q1 report, as expected, according to Bloomberg. In the details, personal consumption was revised up a tenth of a percentage point to an 11.4% gain, a two-quarter high and following a 2.3% gain in Q4. Goods consumption was revised up one percentage point to a 26.6% increase, due to an upwardly revised gain in durable goods from a 48.6% gain to a 49.2% increase, and nondurable consumption from a 14.0% gain to a 15.2% rise. Services consumption, on the other hand, was revised lower from a 4.6% gain to a 4.2% increase in the final Q1 report. Gross private investment, meanwhile, was revised up from a 4.7% drop to a 3.4% decline in Q1, still a three-quarter low. Fixed investment was revised up from an 11.3% increase to a 12.1% gain in the final Q1 report. Nonresidential investment, including office buildings and factories, was revised higher from a 10.8% gain to an 11.7% increase, thanks to an upwardly revised increase in equipment investment from a 13.4% gain to a 15.0% increase. Structures investment was revised up from a 5.8% drop to a 2.0% decline in Q1, the sixth consecutive quarter of decline. Intellectual property investment, however, was revised lower from a 16.9% gain to a 15.3% rise. Additionally, residential investment was revised higher from a 12.7% gain to a 13.1% increase. On the trade side, exports were revised up from a 2.9% drop to a 2.1% decline, a three-quarter low, while imports were revised higher from a 6.7% gain to a 9.5% increase. Finally, government consumption was revised lower a tenth of a percentage point to a 5.7% increase in the final Q1 report. Federal spending was also revised down a tenth of a percentage point to a 13.8% increase, while nondefense spending was revised up from a 44.8% gain to a 45.0% increase. National defense spending, meanwhile, was revised down from a 3.4% decline to a 3.6% drop. State and local spending, however, was unrevised at a 0.8% increase in the final Q1 report, following three consecutive quarters of decline.

Employment

·      Jobless Claims

o  (Jun 3) – Initial jobless claims fell 20k from 405k to 385k in the week ending May 29, slipping below 400k for the first time since the pandemic began and marking the fifth consecutive week of decline. According to Bloomberg, jobless claims were expected to decline to 387k. Continuing claims, however, or the total number of Americans claiming ongoing unemployment benefits, rose from 3.602M to 3.771M in the week ending May 22.

o  (Jun 9) – Initial jobless claims fell 9k from 385k to 376k in the week ending June 5, falling below 400k for the second consecutive week and marking the sixth consecutive weekly decline. According to Bloomberg, jobless claims were expected to decline to 370k. Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, fell by 258k, the biggest drop since mid-March, to 3.5M in the week ending May 29.

o  (Jun 17) – Initial jobless claims unexpectedly rose 37k from 375k to 412k in the week ending June 12, the first rise since late April and a four-week high. According to Bloomberg, jobless claims were expected to decline to 360k. Continuing claims, however, or the total number of Americans claiming ongoing unemployment benefits, remained relatively steady at 3.5M in the week ending June 5.

o  (Jun 24) – Initial jobless claims fell 7k from 418k, revised up from 412k, to 411k in the week ending June 19. According to Bloomberg, jobless claims were expected to decline to 380k. Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, fell from 3.5M to 3.4M in the week ending June 12.

·      Nonfarm Payrolls (Jun 4) – Nonfarm payrolls rose by 559k in May, falling short of the 675k gain expected, according to Bloomberg, albeit a two-month high. April payrolls were revised up from a 266k rise to a 278k increase, while March payrolls were revised higher from a 770k gain to a 785k rise. Thus, the overall change in nonfarm payrolls (May data + net revisions) was 586k. In the details, private payrolls rose by 492k in May, following a 219k gain in April. Goods-producing payrolls, meanwhile, rose 3k thanks to a 23k gain in manufacturing payrolls. Construction payrolls, however, fell by 20k, the second consecutive month of decline. Service producing payrolls rose by 489k in May, following a 255k rise in April, with leisure and hospitality leading the gain with payrolls rising 292k. Education and health payrolls rose by 87k, trade and transport payrolls gained 37k, business services payrolls increased 35k, thanks to a 4k gain in temporary help payrolls, and information payrolls improved by 29k. Additionally, government payrolls increased by 67k in the second month of Q2, despite an 11k decline in federal employment.

·      Participation Rate (Jun 4) – The civilian labor force declined by 53k, following a 430k rise in April. As a result, the participation rate unexpectedly ticked down from 61.7% to 61.6% in May, a two-month low. According to Bloomberg, the participation rate was expected to rise to 61.8%.

·      Unemployment Rate (Jun 4) – Household employment rose by 444k in May, following a 328k rise the month prior. With a 53k decline in the labor force, the unemployment rate fell from 6.1% to 5.8% in May, a tenth of a percentage point more than expected, according to Bloomberg, and the lowest level since March of last year.

·      Average Hourly Earnings (Jun 4) – Average hourly earnings rose 0.5% in May, more than the expected 0.2% increase, according to Bloomberg, and following a 0.7% gain in April. Year-over-year, wages rose 2.0% in May, up from a 0.4% gain in April and a two-month high.

·      Average Weekly Hours (Jun 4) – The average workweek remained at 34.9 hours in May for the third consecutive month.

·      JOLTS (Jun 8) – According to JOLTS – the Job Openings and Labor Turnover Survey – the number of job openings rose from 8.288m, revised up from 8.123m, to 9.286m in April, an all-time high. According to Bloomberg, the number of job openings was expected to rise to 8.200m.

Consumer Activity and Confidence

·      Vehicle Sales (Jun 3) – Total vehicle declined from 18.51m to a 16.99m unit pace in May, more than the expected decline to a 17.30m unit pace, according to Bloomberg and a three-month low. Over the past 12 months, however, vehicle sales rose 40.3%, following a 115% annual increase the month prior.

·      Consumer Credit (Jun 7) – Consumer credit rose $18.612b in April, less than the $20.500b rise expected, according to Bloomberg, and following an $18.584b increase in March.

·      Retail Sales (Jun 15) – Retail sales dropped 1.3% in May, more than the 0.8% decline expected, according to Bloomberg, and the first monthly decline since February’s 2.9% drop. April sales, meanwhile, were revised up from a flat reading to a 0.9% increase. Year-over-year, retail sales rose 28.1% in May, following a 53.4% annual gain in April, a record high. Car sales fell 3.7% in May following a 4.3% increase the month prior, while gasoline stations sales rose 0.7% following a 1.1% decrease the month prior. Excluding autos, retail sales fell 0.7% in May but rose 26.4% over the past 12 months. Excluding autos and gasoline, retail sales decreased 0.8%, but gained 23.8% year-over-year. In the details of the report, clothing sales rose 3.0%, and health and personal care sales gained 1.8%. Additionally, eating and drinking sales also rose 1.8%, and food and beverage sales increased 1.0%, following a 0.7% gain the month prior. On the weaker side, furniture sales slipped 2.1%, and non-store retailer sales fell 0.8%, the second consecutive month of decline. Also, building materials sales dropped 5.9%, miscellaneous sales fell 5.0%, and electronics sales declined 3.4%. Additionally, sporting goods sales fell 0.8%, and general merchandise sales declined 3.3%, despite a 1.6% increase in department store sales.

·      Consumer Confidence (Jun 29) – Consumer confidence, according to the Conference Board, rose from 120.0 to 127.3 in June, the highest reading since February 2020. In the details, present situation rose from 148.7 to 157.7, and consumers’ expectations increased from 100.9 to 107.0 in June, a two-month high.

·      University of Michigan Consumer Sentiment

o  (Jun 11) – The University of Michigan Consumer Sentiment Index rose from 82.9 to 86.4 in June, more than the expected rise to 84.2 and a two-month high. In the details, consumers’ assessment of current conditions improved from 89.4 to 90.6, and consumer expectations increased five points to 83.8 in June, the highest reading since February 2020.

Inflation

·      CPI (Jun 9) – The CPI jumped 0.6% in May, surpassing the 0.5% rise expected, according to Bloomberg, and following a 0.8% gain in April, the largest increase since June 2009. Year-over-year, consumer prices rose 5.0%, the most since August 2008. Food prices rose 0.4%, while energy prices were unchanged in May, following a 0.1% decline in April. Excluding food and energy costs, the core CPI rose 0.7%, more than the 0.5% gain expected, according to Bloomberg, and following a 0.9% increase in April, the largest increase since April 1982. Year-over-year, the core CPI increased 3.8%, the most since June 1992. In the details, commodities prices rose 1.1%, transportation prices increased 2.1% and recreation prices gained 0.2% in May, following a 0.9% gain the month prior. Also, housing prices increased 0.4%, thanks to a 0.3% rise in the OER. Additionally, education and communication costs rose 0.3%, and apparel prices increased 1.2% in May, a four-month high. On the other hand, other goods and services costs declined 0.1%, as did medical care prices, the weakest pace in five months.

·      PPI (Jun 15) – The PPI rose 0.8% in May, more than the 0.5% gain expected, according to Bloomberg, and following a 0.6% gain the month prior. Year-over-year, producer prices jumped 6.6% in May, the largest gain on records dating back to 2010. Food prices rose 2.6% following a 2.1% gain in April, and energy prices increased 2.2% in May. Excluding food and energy costs, the core PPI rose 0.7%, more than the 0.5% gain expected, and following a similar rise in April. Year-over-year, the core PPI increased 4.8%, the largest gain on record. Additionally, services costs rose 0.6%, thanks to a 0.7% gain in trade costs, and a 1.9% increase in transportation and warehousing costs.

·      PCE (Jun 25) – The PCE rose 0.4% in May, a tenth of a percentage point less than expected, according to Bloomberg, and following a 0.6% rise the month prior. Year-over-year, headline inflation increased 3.9%, the most since August 2008. Excluding food and energy, the core PCE rose 0.5% in May, also a tenth of a percentage point less than expected, according to Bloomberg, and following a 0.7% gain the month prior. Year-over-year, core inflation increased 3.4%, the most since April 1992.

Manufacturing and Production Activity

·      ISM Manufacturing (Jun 1) – The ISM Manufacturing Index rose from 60.7 to a reading of 61.2 in May, slightly more than the expected increase to 61.0, according to Bloomberg, and a two-month high. In the details, production fell from 62.5 to 58.5 in May, prices paid decreased from 89.6 to 88.0, and employment declined from 55.1 to 50.9. On the other hand, backlog of orders increased from 68.2 to 70.6, a record-high, new orders rose from 64.3 to 67.0, and new export orders improved from 54.9 to 55.4, a three-month high.

·      Dallas Fed Index (Jun 1) – The Dallas Fed Manufacturing Activity Index declined from 37.3 to a reading of 34.9 in May, more than the expected decline to 36.0, and a two-month low.

·      ISM Services (Jun 3) – The ISM Services Index rose from 62.7 to a reading of 64.0 in May, more than the expected gain to 63.0, according to Bloomberg, the highest reading on records dating back to 1977. All 18 industries reported growth led by gains in retailers, wholesalers, construction, entertainment and recreation. In the details of the report, business activity rose from 62.7 to 66.2, prices paid increased from 76.8 to 80.6, the second highest reading on record, and new orders rose to 63.9 from 63.2 the month prior. Also, backlog of orders rose from 55.7 to 61.1, a record high, and supplier deliveries increased from 66.1 to 70.4 in May. On the other hand, employment declined from 58.8 to 55.3, and imports dropped from 55.7 to a reading of 50.4 in May, an eight-month low.

·      Industrial Production (Jun 15) – Industrial production rose 0.8% in May, up from a 0.5% increase the month prior, and more than the 0.7% gain expected.

·      Capacity Utilization (Jun 15) – Capacity utilization increased from 74.6% to 75.2% in May, a tenth of a percentage point more than expected, and the highest reading since February 2020.

·      Empire Manufacturing (Jun 15) – The Empire Manufacturing Index dropped from 24.3 to 17.4 in June, a three-month low. According to Bloomberg, the index was expected to decline to 22.5 at the end of Q2. In the details, six-month general business conditions rose from 36.6 to 47.7 in June, a one-year high. On the weaker side, prices paid fell to 79.8 from 83.5, shipments decreased from 29.7 to 14.2, and the average workweek declined from 18.7 to 15.1, a two-month low. Additionally, new orders dropped from 28.9 to 16.3, and employment slipped from 13.6 to 12.3, a three-month low.

·      Philly Fed Business Outlook Survey (Jun 17) – The Philly Fed Index declined from 31.5 to a reading of 30.7 in June, more than the expected decline to 31.0, according to Bloomberg, and a four-month low. In the details of the report, employment jumped from 19.3 to 30.7, shipments increased from 21.0 to 27.2, and prices paid rose from 76.8 to 80.7 in June, the highest level June 1979. On the other hand, new orders edged lower from 32.5 to 22.2, a six-month low.

·      Richmond Fed Manufacturing (Jun 22) – The Richmond Fed Index unexpectedly rose from 18 to a reading of 22 in May, an eight-month high. According to Bloomberg, the index was expected to remain at a reading of 18 in June for the second consecutive month.

·      Kansas City Fed Manufacturing (Jun 24) – The Kansas City Fed Index unexpectedly rose one point to a reading of 27 in June, a two-month high. According to Bloomberg, the index was expected to decline to a reading of 24 at the end of Q2.

·      Durable Goods (Jun 24) – Durable goods orders rose 2.3% in May, less than the 2.8% rise expected, according to Bloomberg, albeit a four-month high. Year-over-year, headline orders rose 40.6% in May, following a record 60.4% increase the month prior. Transportation orders rose 7.6%, following a 6.6% decrease the month prior, thanks to a 2.1% rise in vehicles and parts orders, and a 27.4% gain in civilian aircraft orders. Excluding transportation, durable goods orders rose 0.3% in May and rose 26.4% over the past 12 months. In other details, primary metals orders rose 2.2%, and electrical equipment orders rose 1.3%, following a 0.4% gain the month prior. On the weaker side, fabricated metals orders fell 1.1%, machinery orders decreased 0.4%, and computers and electronics orders declined 0.3% in May.  

·      Capital Goods (Jun 24) – Capital goods orders rose 4.2% in May. Nondefense capital goods orders, meanwhile, rose 2.7%, following a 5.0% increase in April. Capital goods orders excluding aircraft and defense – a proxy for business investment – fell 0.1% in May, a three-month low. Year-over-year, however, business investment increased 23.5%.

·      Dallas Fed Index (Jun 28) – The Dallas Fed Index declined from 34.9 to a reading of 31.1 in June, more than the expected decline to 32.5, according to Bloomberg, and a three-month low.

·      Chicago PMI (Jun 30) – The Chicago PMI dropped from 75.2 to 66.1 in June, more than the expected decline to 70.0, according to Bloomberg, and a four-month low. In the details, prices paid and supplier deliveries rose at a faster pace, signaling expansion, while employment and inventories fell at a faster pace, signaling contraction.

Housing Market Activity

·      Construction Spending (Jun 1) – Construction spending rose 0.2% in April after increasing an upwardly revised 1.0% in May. According to Bloomberg, construction spending was expected to rise 0.5% at the start of Q2. Year-over-year, construction spending increased 9.8%.

·      NAHB Housing Market Index (Jun 15) – The NAHB Housing Market Index unexpectedly fell 2 points to a reading of 81 in June, a ten-month low. According to Bloomberg, the index was expected to remain at a reading of 83 for the third consecutive month.

·      Building Permits (Jun 16) – Building permits declined 3.0% in May from 1,733k, revised down from 1,760k, to a 1,681k unit pace, a seven-month low. According to Bloomberg, building permits were expected to fall 0.2% in May. Single family permits fell 1.6%, and multi-family permits dropped 5.8% in May. Year-over-year, building permits rose 34.9% in May, following a 58.4% annual gain in April.

·      Housing Starts (Jun 16) – Housing starts rose 3.6% in May, pulling the annual pace up from 1,517k, revised down from 1,569k, to 1,572k, a two-month high. According to Bloomberg, starts were expected to rise 3.9% in the second month of Q2. Single family starts rose 4.2%, and multi-family starts gained 2.4%. Year-over-year, housing starts jumped 50.3% in May, following a 61.7% increase in April. On a regional basis, starts rose in three of the four regions of the country in May: starts gained 29.9% in the Midwest, 3.8% in the South, and 1.0% in the West. Starts fell, however, 22.4% in the Northeast.

·      Existing Home Sales (Jun 22) – Existing home sales fell 0.9% in May from 5.85m to a 5.80m unit pace, the fourth consecutive month of decline and an eleven-month low. According to Bloomberg, existing home sales were expected to fall 2.4% in May. Single family sales fell 1.0%, while multi-family sales were unchanged. Year-over-year, existing home sales rose 44.6% in May, following a 33.9% increase in April. With a decline in sales, the months’ supply of existing homes rose from 2.4 to 2.5 months, a seven-month high. From a price standpoint, the median cost of a previously owned home rose 17% in May from a year earlier to $372k, an all-time high.

·      New Home Sales (Jun 23) – New home sales unexpectedly dropped 5.9% in May from 817k, revised down from 863k, to a 769k unit pace, a one-year low. According to Bloomberg, home sales were expected to rise 0.2% in May. Year-over-year, sales rose 9.2% following a 40.3% increase in April. With a fall in sales, the months’ supply of new homes rose from 4.6 to 5.1 months, a one-year high. And, from a price standpoint, the median cost of a newly constructed home rose 2.5% in May from the month prior to $374k. Year-over-year, meanwhile, new home prices increased 18.1% following a 17.8% increase the month prior.

·      S&P/CS 20 City Index (Jun 29) – The S&P Case-Shiller 20 City Home Price Index increased 1.62% in April, which was less than the 1.80% gain expected and following a 1.59% rise the month prior. Year-over-year, the 20-city home price index rose 14.88%, up from the 13.36% increase reported in March, and the largest gain since December 2005. Nationally, the S&P CoreLogic Index Case-Shiller index climbed 14.59% from a year earlier, the biggest gain in data going back to 1988.

·      Pending Home Sales (Jun 30) – Pending home sales unexpectedly rose 8.0% in May, the largest gain in eleven months, and following a 4.4% decline in April. According to Bloomberg, pending home sales were expected to decline 1.0% in May. Year-over-year, pending home sales rose 13.9% in May, following a jump of 53.7% the month prior.

Trade and Currency

·      U.S. Dollar

o  (Jun 30) –The dollar posted its best monthly rise in June since November 2016, as the Fed updated its outlook for rates and growth and as the concerns for the Delta variant spread. The dollar rose about 3% to close out the month at $92.44.

·      Trade (Jun 8) – The U.S. trade balance narrowed 8.2% from $75.0b to $68.9b in April, marking the first time the gap has narrowed in 2021. Exports increased 1.1% to $205 billion, the most since January 2020, while imports dropped 1.4% to $273.9 billion in April.

·      Import Prices (Jun 16) – Import prices rose 1.1% in May, more than the 0.8% rise expected, and a two-month high. Year-over-year, import prices jumped 11.3%, the most since September 2011.

Monetary Policy, Reports, and Commentary

·      Atlanta Fed GDPNow Forecast

o  (Jun 24) – Following a smaller-than-expected rise in durable goods orders in May and a decline in business investment in the details of the report, the Atlanta Fed's GDPNow estimate edged down from 10.1% to 9.7% in the second quarter.

·      Fed Speak

o  (Jun 3) – “We're talking about talking about tapering, and that is what you want out of us. You want to be long-viewed here," San Francisco Fed President Mary Daly said on CNBC.

o  (Jun 22) – St. Louis Fed President James Bullard spoke at a virtual event hosted by the Official Monetary and Financial Institutions Forum, suggesting the U.S. recovery is much faster than expected given the unprecedented nature of the shutdown. At this point, given the accelerated rebound in activity, the Committee needs to be “nimble,” he said, in terms of policy measures to reflect the changing landscape. Stopping short of indicating support for an adjustment to the Fed’s current policy position, Bullard was clear that policy makers need to be ready to shift their policy stance should inflation prove more persistent than expected.

o  (Jun 22) – Dallas Federal Reserve President Robert Kaplan spoke at the virtual event hosted by the Official Monetary and Financial Institutions Forum, suggesting it may be appropriate to begin to adjust assets purchases: “I think we’d be healthier, as we’re making progress in weathering the pandemic and achieving our goals, to start adjusting these purchases – Treasuries and mortgage backed securities – sooner rather than later.”

o  (Jun 23) – Federal Reserve Chairman Jerome Powell testified in front of the House Select Subcommittee on the Coronavirus Crisis. As expected, Powell detailed some of the extraordinary measures taken by the Committee to stabilize the market during the crisis, hailing the policies as both necessary and extraordinary. Regarding the economy, the Chairman reiterated the message from the most recent June FOMC statement suggesting growth has picked up along with prices and hiring, but some further progress is still needed to return to pre-crisis vitality. Furthermore, regarding prices, the Chairman affirmed the Committee’s longstanding assessment that price pressures will prove transitory and thus, do not at this point warrant a change in policy: “As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal.” During the Q&A session, the Chairman did concede that the recent bout of inflation, while still expected to prove transitory, was in fact higher than expected and furthermore, could prove longer lasting than previously anticipated. The majority of the overshoot, or potentially all of it, Powell explained, comes from categories that are directly affected by the re-opening of the economy, such as used cars and trucks as opposed to medical care costs and rents which have already slowed their rate of accent or declined outright. “What we're seeing now, we believe, is inflation in particular categories of goods and services that are being directly affected by this unique historical event that none of us have ever lived through before.” Nevertheless, Powell added, “I will say that these effects have been larger than we expected, and they may turn out to be more persistent than we have expected.”

·      June 15-16 FOMC Meeting

o  As expected, the Fed opted to keep rates unchanged at 0.00-0.25%, as well as maintain its current pace of asset purchases at $120 billion a month at its latest June meeting. The statement itself was also little changed, save for a mention of the national vaccine rollout reducing the risks of the virus to the recovery. Along with the statement, the Fed released an updated Summary of Economic Projections (SEP). In the latest release, the median projection for rates, growth and inflation were all revised higher. The 2021 growth forecast was revised up from 6.5% to 7.0%, with the forecast for 2022 steady at 3.3%. On prices, the median forecast for inflation was pushed higher from 2.4% to 3.4% in 2021, although longer-run, the Fed continues to anticipate that prices will cool back down towards the target of 2%. Finally, on rates, the consensus view is a potential for two rate hikes by the end of 2023 with 13 of the 18 members now expecting at least one hike by that time versus just seven in the March release. At the press conference following the release of the statement, Chairman Powell reiterated the Fed’s assertion that the recent bout of inflation is temporary, and thus, the upward revision to the Fed’s rate forecast is more a reflection of a larger-than-expected jump in growth. That being said, Powell also reminded market participants that the SEP is a forecast and not a commitment to policy adjustments. From a policy standpoint, as expected, Powell continued to reiterate the need for accommodation given the uneven nature of the recovery and “substantial further progress” needed in the labor market with millions of Americans yet to return to the labor market. Finally, from a policy implementation perspective, as expected, the Chairman reiterated the deliberate and transparent pathway that tapering will follow: The Fed will give ample notice before a discussion to taper occurs, and furthermore, offer additional notice before an announcement to taper is made. Consider this to be talking about talking about tapering, he said, suggesting now is the time to retire the phrase. Thus, despite some in the marketplace urging the Fed to act with a greater sense of urgency, the Committee has been very clear it will be patient when it comes to unwinding asset purchases, a precursor to a rise in rates.

Domestic News and Activity 

·      Politics and the Biden Administration

o  (Jun 2) – JBS, the world’s largest meat producer, reported a ransomware attack that shut down all of its beef facilities. The company's meatpacking plants also experienced some level of disruption due to the hack, which was attributed to a notorious criminal gang based out of Russia.

o  (Jun 7) – G7 nations reached an agreement on a global minimum tax. The deal would require companies to pay at least a 15% tax on income, regardless of where they are based, attempting to remove the incentive to relocate operations to countries with lower tax rates. The new rules would apply to multinationals that have a profit margin of at least 10%, while governments would share the right to tax 20% of profits above that threshold. The notion of a global tax rate has been debated for years with the key question being whether to tax companies based on the location of their income or the location of their headquarters. While some, including Treasury Secretary Janet Yellen, have suggested the new framework would halt a global "race to the bottom" on corporate taxes, others feel that it could be hard to enact and enforce on an international scale. While negotiations have progressed, the new rule is hardly a done deal. There would need to be a global agreement, meaning support is needed from other large economies like India and China where officials want to retain control over domestic tax policies, and Ireland, which has an intentionally low tax rate to encourage foreign investment. Also, in the U.S., the new deal would need to be passed through Congress where Republicans have already indicated a resistance to a rise in taxes.

o   (Jun 7) – Treasury Secretary Janet Yellen appeared on Bloomberg News, encouraging the Biden administration to push through its $4 trillion spending proposal regardless of the impact on the market: “If we ended up with a slightly higher interest rate environment it would actually be a plus for society's point of view and the Fed's point of view. We've been fighting inflation that’s too low and interest rates that are too low now for a decade. We want them to go back to a normal interest rate environment, and if this helps a little bit to alleviate things then that's not a bad thing – that's a good thing." Yellen went on to say, “I will not give up on the next packages. They're not meant as stimulus, they're meant as investments to address long-standing needs of our economy."

o  (Jun 8) – Covid variants remain a threat to the recovery. Hearing impairment, severe gastric upsets and blood clots leading to gangrene, symptoms not typically seen in Covid patients, have been linked by doctors in India to the Delta variant. As of May, according to the World Health Organization, cases of the Delta variant had been confirmed in 62 countries. In the United States, it made up to 3% of coronavirus cases as of May 8, according to the Centers for Disease Control and Prevention. In the U.K., the Delta variant became dominant, and according to health officials, it has a substantial increased rate of transmissibility compared with previous variants.

o  (Jun 9) – The Senate approved the U.S. Innovation and Competition Act, a $250B package reportedly aimed at challenging China's technological ambitions. According to the details of the bill, as reported by the WSJ, about $190B would be directed at U.S. technology and research to better compete globally, including money for cutting-edge science and artificial intelligence via the National Science Foundation. Another $54B would be allocated to increase U.S. production and research into semiconductors and telecom equipment, as well as design and manufacturing initiatives. The Commerce Department would also receive $10B in funding to designate regional technology hubs for R&D and be able to match financial incentives offered by states and local governments to chipmakers who expand or construct new factories.

o  (Jun 9) – Thousands of websites went dark after a configuration problem at Fastly, a content delivery network operator that speeds uploading or streaming times for webpages. In response to the event, Fastly said in a statement, "Early June 8, a customer pushed a valid configuration change that included the specific circumstances that triggered the bug, which caused 85% of our network to return errors. We detected the disruption within one minute, then identified and isolated the cause, and disabled the configuration. Within 49 minutes, 95% of our network was operating as normal." Investors were impressed with Fastly's turnaround time to address the problem, but the outage itself highlighted the delicate and interconnected nature of the Internet infrastructure landscape.

o  (Jun 14) – President Biden called for more spending, globally. At a G7 summit held in the U.K., Biden pressed world leaders to push back against China, as well as focus on a path towards decarbonization through a project called “Build Back Better for the World.” The proposal calls for spending $100B per year to help developing nations' climate change transitions, while sticking to appropriate climate standards and labor practices. The funding would supposedly come from multilateral development banks, like the IMF and World Bank, as well as the private sector in order to provide a “higher quality" alternative to China's Belt and Road Initiative, which, as Bloomberg News points out, has been criticized for its leverage in creating political goodwill, massive debt and a way to spread Beijing's influence.

o  (Jun 14) – At the G7 summit, world leaders pledged 1B vaccines to developing countries over the next year. There was further “widespread” support backing a U.S.-led call for a probe into the origins of the pandemic, as well as demands to press China on human right reforms.

o  (Jun 23) – As Americans continue to return to life as usual, questions remain about how and when to return to the office. With less than 50% of the American population fully vaccinated and the Delta variant on the rise in the U.S., some companies are requiring vaccination verification. According to reports, Morgan Stanley, for example, barred unvaccinated workers from heading back to offices in NYC and Westchester County. Thus, for some companies the decision has been clear, staff who are not fully vaccinated will continue to work remotely, but for how long? Will vaccination become a requirement to not only work in the office, but to remain an employee? These are the questions many corporations are facing, but few have offered answers as of yet. Recall, the Delta variant was first identified in India and now makes up 20% of all new cases in the U.S., up from 10% two weeks ago, according to the Centers for Disease Control and Prevention (CDC). Studies suggest the variant is around 60% more transmissible than the original Alpha strain.

o  (Jun 25) – All 23 institutions passed the Fed’s latest “Dodd-Frank Act Stress Test.” The results, while good news, are as expected. After all, banks received massive support from the Federal Reserve last year and with a good portion of presumed losses not being realized loan loss reserves increased. Furthermore, with stock buybacks or dividend payouts suspended, capital cushions grew larger and larger, so lenders were in a very good position going into the Fed’s stress tests, which they all passed with flying colors. Included within the exam was a severe global recession scenario with the U.S. unemployment rate rising to 11% and U.S. stock values dropping nearly 50%. Even with presumed losses of over $400 billion, according to the findings, loss-cushioning capital would still be more than double the minimum required levels, the Fed said. Thus, the results offer some reassurance that key financial institutions would be able to weather a severe economic downturn. Although to be fair, those results are somewhat anticlimactic given the industry underwent a real-life version of this last year. Nevertheless, as a result of the passing grade, temporary restrictions on returning capital are set to be reversed which could result in tens or even hundreds of billions of dollars back to investors.

o  (Jun 28) – States that prematurely rolled back enhanced benefits ahead of the September 6 expiration date found that workers are returning to the labor market at a faster rate than those that are continuing to dole out the generous benefits. Numerous reports have indicated fiscal policy measures as a barrier to growing the pool of potential labor by creating an incentive to remain outside of the labor force. As noted in the WSJ, 21 states have rolled back enhanced benefits as of June 26 with four more states expected to end the benefits at or before July 19.

o  (Jun 30) – In a 5-4 decision, the Supreme Court ruled to allow an extension on the national moratorium on the eviction of tenants for another month. According to reports, Chief Justice John Roberts and Justice Brett Kavanaugh joined with the court's three liberal justices to leave the moratorium in place. “Because the CDC plans to end the moratorium in only a few weeks, on July 31, and because those few weeks will allow for an additional and more orderly distribution of the congressionally appropriated rental assistance funds, I vote at this time to deny the application" that had been filed by real estate firms and trade associations, Kavanaugh wrote. According to data from the Department of Housing and Urban Development, by the end of March, 6.4M American households were behind on their rent.

International News and Activity 

·      European Union

o  (Jun 8) – EU GDP fell 0.3% in Q1, a smaller contraction than the 0.6% decline originally reported. A less severe drop in growth coupled with an accelerated vaccine rollout appears to be driving higher forecasts for a European recovery. While some restrictions remain in place, the European vaccination rate has begun to ramp up more recently as supply bottlenecks have eased, but the vaccination rate is still lower compared to the U.S. and U.K. with just 47% of adults having received their first jab, compared with 64% in America and 75% in Britain.

·      China

o  (Jun 14) – While some leaders hailed President Biden’s new spending proposals centered on decarbonization, the response from Beijing was less favorable. “Those fanning confrontation are definitely on an ill-advised path... Ganging up, pursuing bloc politics and forming small cliques are unpopular and doomed to fail," Chinese foreign ministry spokesman Wang Wenbin declared.

·      Israel

o  (Jun 14) – Israel's longtime leader, Benjamin Netanyahu, was replaced by Naftali Bennett's "change coalition." Netanyahu was prime minister for a record 12-years – as well as a 3-year stint in the late 90s – making him the longest-serving Israeli leader in history. Netanyahu was known for his support of a free market economy, national security and Israel's diplomacy on the international stage.

·      The U.K.

o  (Jun 24) – The Bank of England (BOE) opted to keep policy unchanged at its latest June meeting. The BOE maintained rates at 0.1% and purchases at the current level of £895 billion ($1.24 trillion). The decision was widely supported save for one economist who noted inflation pressures were mounting and monetary stimulus was no longer appropriate – a similar argument that some of the more hawkish Fed members have expressed in recent commentary.

-Lindsey Piegza, Ph.D., Chief Economist