Fed Chair Powell Indicates Fed Taper Will Begin

Fed Chair Jerome Powell indicates Fed will begin taper, but warns it would be “premature” to raise rates. Powell made the comments on the final day of Fed media availability before FOMC members enter a “blackout” period ahead of their next meeting. While Powell acknowledged that the risks for higher inflation are now “clear” he re-iterated that an immediate rate hike was unlikely. Swap rates and Treasury yields pulled back on the day, reversing Thursday’s move and then some- the 10-year yield closing at 1.63% after touching 1.70% late in the session yesterday.

U.S. service activity picked up in October while manufacturing activity slightly contracted. The IHS U.S. Markit purchasing managers index (PMI) data showed service activity grew from the prior month – increasing to a 58.2 reading (anything above 50 indicates growth). Manufacturing activity continues to grow as well but failed to meet forecasts, at least partially attributable to well-documented supply disruptions. Price pressures continue to rise as both input costs and prices received hit record highs. Material shortages and higher wages were stated as the primary reasons for increasing costs.

Bank third-quarter earnings buoyed by reserve releases, optimism for future loan growth. In the early days of the pandemic, banks took on large reserves in preparation for massive credit losses. However, historical amounts of fiscal and monetary stimulus kept a large-scale economic fallout at bay and banks now find themselves releasing billions of dollars in reserves which in turn has lifted earnings. Bank stocks have also been helped by the largely optimistic guidance around loan growth- although bank executives as a whole have cautioned that their robust pipelines will be somewhat constrained by supply chain disruptions and material shortages.