by Blaine Dickason
Senior Vice President
Trading and Fixed Income Portfolio Management
Inflection Points
Earlier this month in an interview with 60 Minutes, Federal Reserve Chair Jerome Powell indicated he believed the U.S. economy “seems to be at an inflection point” due to widespread vaccinations and previously enacted stimulus measures. He added his expectation that the economy would begin to grow “much more quickly” and that the pace of job creation would accelerate. Both the preliminary first quarter GDP data reported this week and further declines in weekly jobless claims suggest we remain on track for rapid improvement towards pre-COVID-19 levels of economic activity. Consumer confidence reported this week shows U.S. consumers agree.
Source: Bloomberg
This week, Chair Powell held his standard press conference following the conclusion of the Federal Open Market Committee meeting and endorsed the view that risks to the economy continue to abate. While the reported economic data has clearly improved and is tracking higher, many investors are looking ahead for any signal from Powell that the ongoing and unprecedented monetary stimulus might begin to be scaled back.
In addition to holding interest rates near zero, the Fed has continued its monthly purchase of $120 billion of U.S. Treasury and mortgage-related securities it began last spring to keep market rates low and maintain easy financial conditions. Based on Powell’s comments, the Federal Reserve remains resolute in maintaining current stimulus until ‘substantial’ progress has been made towards their goals. This includes recovering the remaining eight million jobs lost between the most recent measure and February 2020. For those questioning whether the current ‘easy’ policy would lead to excessive inflation, Powell suggested no one should doubt their willingness and ability to address elevated prices beyond the short-term pressures from the economic reopening. The next inflection point of note for financial markets may be when they decide to take this proverbial punch bowl away.
Bottlenecks
Anyone that has recently bought a two-by-four or tried to purchase an outdoor heat lamp this winter has likely felt the impact of bottlenecks in the economy. Not only do certain goods become scarce or develop long lead times, they also tend to become more expensive as well. Given recent fears of resurgent inflation, these supply constraints have rekindled doubts that policymakers can rein in spiraling prices.
The preliminary first quarter GDP report released this week shed some light on supply constraints in the economy, indicating that inventory drawdowns detracted from GDP. The U.S. may be reopening quickly but until the rest of the world can do the same, supply chains may remain disrupted. This is one more reason we believe the United States should support global vaccination efforts.
Ultimately, bottlenecks tend to be self-correcting for as the old economic saying goes, “the cure for high prices is … high prices.” Supply increases in response to higher prices while consumers find substitute goods and reset the price equilibrium. The Federal Reserve has identified many of the current bottlenecks as being directly associated with the re-opening of the economy and thus not affiliated with sustained, year-on-year increases that would be more worrisome. This is what gives them confidence the annualized price gains we are experiencing this year will indeed be transitory.
Week in Review and Our Takeaways for the Week
U.S. personal incomes soared 21.1 percent in March powered by a third round of stimulus checks
This is the highest month-over-month increase since records have been kept dating back to 1946
S&P 500 earnings for the first quarter of 2021 are now expected to grow +40.9 percent, up from estimated +21.1 percent growth as of March 31