The once-widespread sense of anticipation around Friday’s virtual Jackson Hole speech by Federal Reserve Chairman Jerome Powell is fading before the event has even started.
That’s because the spreading delta variant of COVID-19 is seen as hamstringing Powell’s options for saying much more than what’s already been implied by the Federal Open Market Committee’s July minutes: that most officials support a 2021 start to the tapering of bond purchases.
Attention is now turning instead to the Sept. 3 release of August nonfarm payrolls, which will help set the tone for policy makers’ meeting later next month, as well as the abundance of cash that continues to build up in the financial system. That cash — which JPMorgan Chase & Co. estimates could add up to an additional $850 billion to $1 trillion during the Fed’s tapering process — is likely to restrain how high Treasury yields can go over the next year, while continuing to stoke investor appetite for risky assets, analysts said.
“We could go through the better part of 2022 with abundant cash, “ said Mark Luschini, chief investment strategist at Janney Montgomery Scott, which oversaw $124 billion as of June. That would keep market-based rates tamer than they might otherwise be and “positions equities as the asset class of choice,” he said, adding that his firm still likes “high-quality and high-yield” corporate bonds and is being “a little bit careful about Treasurys.”
Investors sent stocks higher once again on Tuesday, with the S&P 500 index
scoring a record close and the Nasdaq Composite Index
finishing above the 15,000 milestone for the first time. The moves were accompanied by a warning from analysts at BofA, who see a rising risk of a large “fragility” shock heading into the fall.
Large investors have already parked more than $1 trillion in excess cash through reverse-repurchase agreements with the Fed. That vast pool of liquidity is still searching for a home and, as it continues to grow, is sending investors into the riskiest parts of the market, such as Asian equities and entertainment stocks beaten down by the pandemic, said Ben Emons, head of global macro strategy at New York-based Medley Global Advisors.
The cash pile is also putting pressure on the front end of the Treasury curve and yields could keep trending lower across the board in the next six to eight months, given a lack of safe, positive-yielding investment choices other than Treasurys, according to Dimitri Delis, a senior econometric and macro strategist at Piper Sandler Cos.
who is based in Chicago.
He doesn’t rule out the possibility of the 10-year rate
going briefly below 1% again, as it did last year, considering the number of non-U.S. money managers still searching for yield. About the only catalyst that could break that downward trend, albeit briefly, would be the passage of a $3.5 trillion package targeting social spending and other Democratic priorities, Delis said.
Meanwhile, the Sept. 3 nonfarm payroll report matters because a number that matches or exceeds expectations for a 943,000 gain in August would leave the September FOMC meeting as one of the few opportunities left to “tee up an announcement for tapering to start” by year-end, according to Luschini.
He said that about the only new development that might come from Powell on Friday is that “he could go out of his way to detach the end of tapering from an immediate lead-up to a rate increase campaign,” suggesting policy rates could stay near zero for even longer.