FOMC minutes: Fed staff outlined $15B/month taper path

Highlights of the FOMC minutes:

  • Four mentions of transitory inflation, including “staff continued to expect that this year’s rise in inflation would prove to be transitory”
  • 8 mentions of tapering, including an outline of the path
The illustrative tapering path was designed to be simple to communicate and entailed a gradual reduction in the pace of net asset purchases that, if begun later this year, would lead the Federal Reserve to end purchases around the middle of next year. The path featured monthly reductions in the pace of asset purchases, by $10 billion in the case of Treasury securities and $5 billion in the case of agency mortgage-backed securities (MBS). Participants generally commented that the illustrative path provided a straightforward and appropriate template that policymakers might follow, and a couple of participants observed that giving advance notice to the general public of a plan along these lines may reduce the risk of an adverse market reaction to a moderation in asset purchases. Participants noted that, in keeping with the outcome-based standard for initiating a tapering of asset purchases, the Committee could adjust the pace of the moderation of its purchases if economic developments were to differ substantially from what they expected. Several participants indicated that they preferred to proceed with a more rapid moderation of purchases than described in the illustrative examples.

Left-for-dead commodity rallies are coming back to life

Lumber and natural gas in focus

Cathie Wood’s favorite recent commodity chart is lumber. Her and other commodity bears have been overlaying it with other commodities in a hackneyed attempt to show that every spike will result in a bust.
In general, chart overlays are bad practice if they’re not highly correlated assets over the long term. But they’re a favorite of those looking for attention.
The thing is, while lumber has been used as a market to foreshadow all others (don’t get me started on iron ore, which is about Chinese policy) the latest trend in the price of trees is higher. Lumber futures are back up to $750 from an August low of $482.
lumber prices
The futures market in lumber is extraordinarily thin but cash prices have also made a move to the upside, with the latest pricing around $580 and rising 4.5% since last Friday. Random Lengths pointed to to upward momentum across grades as consumption outpaced production though noted that buyers remained cautious. But if you factor in yesterday’s call from Goldman Sachs for a multi-year boom in US housing and there is plenty to like.
A commodity at a different stage of a boom is European natural gas. To me and everyone else, the price action on October 6 looked like a blowoff top. However TTF prices made a low the following day but haven’t declined or hit a new low since. They’re up 10% today on forecasts for colder weather and lighter wind.

TTF prices

EIA: US crude oil output to fall 260k bpd this year vs 200k bpd prior estimate

EIA sees a larger fall in US output

  • EIA sees crude output at 11.02m bpd this year
  • Sees output at 11.73m bpd next year
The drop in estimated production is almost completely covered next year. I would be surprised to see that much production growth in the US given the draw on DUCs and the lack of drilling.
Meanwhile, the White House said its speaking with US oil and gas producers on how the industry can help bring down prices, according to a report.
Add this to the inflationary debate as well:
Compared with last winter’s heating costs, EIA forecasts U.S. households will spend 54% more for propane, 43% more for heating oil, 30% more for natural gas, and 6% more for electric heating. U.S. households will spend even more if the weather is colder than expected.

They also note that the National Oceanic and Atmospheric Administration expects a slightly colder winter this year than last year

US dollar gives back the post-CPI move and falls to the lows of the day

US dollar gives it back

This is the second day of choppy trade and whipsaws in the FX space. Yields and the US dollar initially rose on rising wages in the CPI report but both reversed soon afterwards.
One of the things at work is a big bid in long-dated Treasuries ahead of today’s bond auction.
USD/JPY topped out fractionally above yesterday’s fresh cycle high and has now retreated below the Asian low, carving out a short-term double top with a target at 113.00.
US dollar gives it back

The bill to increase the US debt limit has passed in the House – deal done

I should say more correctly that voting continues, but there are sufficient yes votes to pass the bill already.

This was to be expected as the Dems have the majority in the House. The bill passed the Senate last week.
Now it is off to US President Biden for signing, Biden will not delay doing so.
Update, final vote is 219-206 to pass the bill along party lines. Raising the debt ceiling by US$480 billion, enough through to early December,

Japan manufacturer sentiment has hit a 6-month low (Reuters Tankan for October)

The Reuters Tankan monthly poll is intended to track the quarterly Bank of Japan tankan survey.

Sentiment index for manufacturers 6 in October
  • from 18 in September
  • its lowest since April
Service index rose to -1
  • from -2 prior
Comments from some of the respondents express familiar themes, in brief:
  • business hasn’t returned to what it was before the coronavirus, the worst of the pandemic is over and conditions are on a recovery trend
  • raw material prices are surging, it’s not being reflected in sales prices as consumers’ deflationary mindset remains strong
  • Demand for semiconductor-related products is strong but we’re being impacted by production cuts at car companies and firms making factory machinery
Poll of 503 big and mid-sized companies
  • conducted from Sept. 29 to Oct. 8
  • 267 responded
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