Dow was off 15, decliners over advancers about 5-4 & NAZ fell 75. The MLP index crawled up to 181 & the REIT index declined 3+ to the 459s. Junk bond funds fluctuated & Treasuries ran into selling. Oil edged higher in the 73s & gold slid back 1 to 1948.
AMJ (Alerian MLP index tracking fund)
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All year the Federal Reserve's message on inflation has been consistent: This year's surge is transitory, & inflation will soon return close to the central bank's 2% target. Yet look more closely & it is clear officials are turning less sanguine—which that explains growing eagerness to start raising interest rates. Last Sep, long before the supply bottlenecks emerged, the median forecast by Fed officials was for core inflation (which excludes food & energy) in 2022 of 1.8%. Every few months since then they have nudged that up, & in the forecasts released Wed they see core inflation next year at 2.3%. While current-year forecasts get pushed around a lot by temporary factors such as a jump in oil prices, the next-year forecast reflects where inflation is expected to settle once temporary factors recede. The message from the Fed's latest projections is that "transitory" is lasting an awfully long time. Indeed, next year’s projected 2.3% is the highest next-year core inflation forecast since projections were first published in 2007. This might explain why the Fed is accelerating plans to raise interest rates. The Fed is now buying $120B a month in bonds & wants that to fall to zero before it starts to raise rates. On Wed, the Fed signaled it would likely start tapering those bond purchases in Nov, which means the process would be over by mid-2022, clearing the way for a rate increase. ½ of Fed officials think rates will start rising by late next year. Just last Mar, a majority of officials didn't see that happening until 2024. What changed? It isn’t because the economic outlook is stronger. In fact, officials now see slower growth & higher unemployment than they did in Mar, Chair Jerome Powell explained that some officials simply wanted more confidence the expected recovery would materialize. But inflation risks clearly play a part. A 2.3% inflation rate isn’t a big deal. Indeed, it would conform pretty closely to the Fed’s new goal of letting inflation run above 2% for a while to compensate for the many years it ran below 2%. Yet if officials are wrong, they are likely to have proved too low in their forecasts. With unemployment expected to fall to 3.8% by next year & 3.5% by 2023, the economy will be operating with little or no spare capacity, conditions that typically cause inflation to rise. Fed officials think inflation risks are to the upside; a majority said so. 6 of 18 Federal Open Market Committee participants think core inflation will be 2.5% or higher next year.
Fed officials see ‘transitory’ inflation lasting quite a while
The 10-year Treasury yield rose again as rates turned around this week due to the Federal Reserve inching closer to pulling away its emergency pandemic stimulus. The Fed said this week that it would taper its $120B in monthly bond purchases “soon” & Chair Jerome Powell said he would need to see just one more good jobs report to convince him the economy is ready for the removal of this stimulus. The central bank then wants to wrap up the taper by mid-year next year, with a rate hike following before 2022 is out. The 10-year Treasury note gained 4 basis points on Friday to 1.456% after ending last week at 1.37%. At one point earlier this week amid fears from a possible China property crisis, the yield touched as low as 1.29%. The yield on the 30-year Treasury bond was up nearly 5 basis points at 1.973%. Yields move inversely to prices. Also, US new-home sales increased for the month of Aug, the Census Bureau reported.
10-year Treasury yields increase on week as Fed inches closer to bond taper
Chinese property developer Evergrande has not said whether it will fulfil its interest payments on its $ bond – a key milestone investors have been keeping their eyes on. The interest payment due Thurs amounted to $83M. It was for a $2B $-denominated bond that's due to mature in Mar 2022. $ bonds are typically held by foreign investors. Today, the company had not made any announcement, or any filing to the Hong Kong exchange, leaving investors in limbo. One portfolio manager said that no interest payments for the Mar 2022 bond had flowed into his clients' accounts as of the end of yesterday. His clients are mostly wealthy individuals, said the portfolio manager who has been in Asian fixed income for 15 years. Yields on this bond have skyrocketed to more than 560%, from just over 10% earlier this year. Even if no payment is made on Thurs, the company will not technically default unless it fails to make that payment within 30 days. The indebted real estate firm has another coupon payment due next Wed – a 7-year $-denominated bond maturing in Mar 2024. For the rest of the year, Evergrande has interest payments due each month in Oct, Nov & Dec.
Evergrande stays silent on its $83 million dollar bond interest payment, leaving investors in limbo
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