Stocks edge lower, Jolts record, DC focus, strong 10-year auction, bitcoin weaker

The low volume grind higher in US stocks is taking a break.  Still nowhere near providing a decent pullback, investors remain adamant on buying any weakness.  The delta wave may be peaking, but the Fed is clearly in wait-and-see mode over the next couple of months to see how the economy holds up.  The Fed’s Williams delivered some dovish comments that support the idea that the soonest the Fed could taper is December.  Williams anticipates that it could be appropriate to start reducing the pace of asset purchases this year.  His growth outlook for 2021 is around 6% and he sees inflation slowing to about 2% next year.  He stands alongside the doves in thinking there is still a long way to go before reaching maximum employment.  Williams is clearly in the inflation is transitory camp and helped send Treasury yields to their session lows.

The Fed’s beige book didn’t tell us anything the market didn’t know already, just noting that growth downshifted slightly to a moderate pace in early July through August.

Stocks remain well supported given the strong outlook for growth next year and Fed hesitancy to raise interest rates over the next couple of years.  Wall Street has mostly priced in tapering, but still remains unconvinced interest rates will go up anytime soon.

US Jolts Job Openings hits record

The July Jolts job openings report showed employers are not making much progress in filling vacancies.  A record 10.9 million jobs were available in July, which easily outpaced the 8.7 million unemployed workers total in July.  Substantial progress in the labor market recovery will not get any help with the next jobs report as Hurricane Ida will lead to many disruptions in hiring and many parents will wait to see how the return to school goes for unvaccinated children.  The labor market recovery is still intact; it’s just that the next month won’t be pretty.

DC

The focus is shifting back to DC and investors are monitoring the back and forth posturing over new spending amongst Democrats.  Senator Manchin has voiced support for as little as USD 1 trillion, much less than the USD 3.5 trillion that is being drafted.

White House supports a short-term funding bill to avoid a shutdown at the end of the month.  The stopgap would include USD 6.4 billion for Afghan aid, USD 14 billion for natural disaster assistance, and an additional USD 10 billion in relief.

Wall Street is not blinking over anything happening in DC, as expectations still remain high that the infrastructure deal will pass and that the spending bill will get trimmed down towards something in the USD 2 trillion neighborhood and that will appease moderate Democrats.

Treasuries/FX

A USD 38 billion auction for 10-year notes showed rather impressive demand.  The auction drew 1.338%, much lower than the 1.352% that traded pre-sale.  Foreigners were big buyers as they wanted to take advantage of the recent runup in yields.   Wall Street still thinks we will be living in a low interest rate environment for a while, so fixed income traders are snatching up yield here.  The dollar has been a sideways mess and that will likely continue a while longer.

Bitcoin

Following yesterday’s crash, bitcoin is struggling to shake off regulatory fears as cryptocurrency traders grow concerned over the SEC’s expected regulation over coinbase’s interest-earning product.  Many cryptocurrency traders were embracing the move towards banking and the high annual percentage yields (APY) offerings.  Bitcoin is still heavy on disappointment with El Salvador’s adoption of bitcoin as legal tender may delay other countries in following suit and opening their doors to cryptos.  El Salvador is the big experiment for the rest of Latin America and Africa, which may trigger some hesitancy for other central banks to recognize and regulate cryptocurrencies.

The next big risk event for bitcoin is the Fed’s paper on central bank digital currencies, which could have an overwhelming impact on guidelines for stablecoins.  Stablecoins are used to purchase bitcoin, so harsh restrictions could indirectly drag bitcoin lower.

The long-term bull thesis for many crypto traders is unchanged as mainstream adoption heads in the right direction and demand remains elevated for hedges against excessive monetary and fiscal policies.  The USD 45,000 level should hold for bitcoin, but if it breaks buyers will likely wait until USD 40,000 before coming in strong.

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