Rates Decline After Empire State Factory Index Misses Forecast

Rates close lower ahead of Fed town hall

Rates were pressured early on in the day after China’s weak industrial output number and the Empire State factory index forecast miss.  Focus has now moved to tomorrow’s town hall led by Fed Chair Powell, which will be closely monitored for any hints around the Fed’s taper timeline, as will the most recent FOMC minutes to be released Wednesday.  Treasury yields and swap rates ended the day 1-2 bps lower across the curve – the 10-year yield fell as low as 1.22%, ultimately closing 1 bp lower from last Friday’s close at 1.27%.  Major US equity indices closed mixed – the S&P 500 and DJIA both rose 0.3%, while the Nasdaq fell 0.2%.

NY Empire State factory index fell to 18.3 in August, well below the forecasted level

The index includes data gathered by the NY Fed from their monthly survey of manufacturers on general business activity.  In July, the index rose to a record high of 43, supported by an uptick in new orders, number of employees, and prices received.  July’s increase was all but erased in August, after new orders, shipments, and inventories declined more than expected.  Price pressures continued to weigh on the manufacturing industry, with the report stating input prices rose “sharply.”  The future business conditions index climbed higher, indicating “firms remained optimistic that conditions would  improve over the next six months, with substantial increases in employment and prices expected.”

July FOMC minutes may provide additional insight into Fed’s tapering timeline

Over the past few weeks, talk of the Fed’s taper timeline has attracted much market attention.  The strong rise in nonfarm payrolls in July’s jobs report along with concerns of possible, non-transitory inflation has the market guessing if the Fed’s expected taper timeline will be pulled forward, and Wednesday’s FOMC minutes will be closely watched for any additional hints.  Here is a summary of some comments from Fed officials over the past few weeks:

• Fed Chair Jerome Powell: “Conditions in the labor market have continued to improve, but there is still a long way to go.”
• Chicago Fed President Charles Evans: “The benchmark for that bond ‘taper’ is likely to be met ‘later this year’ based on expected strong continued job growth.”
• Boston Fed President Eric Rosengren: “I would expect if we continue to have (jobs) reports like we’ve had over the last two, with very substantial payroll employment gains, that by the September meeting, we would, in my view, meet the substantial further progress criteria, and that would imply starting to taper sometime this fall.”
• San Francisco Fed President Mary Daly: “I remain very optimistic and positive about the [autumn] and ongoing improvements in the key variables we care about. That for me means it’s appropriate to start discussing dialing back the level of accommodation that we’re giving the economy on a regular basis, and the starting point for that is of course asset purchases.”
• Dallas Fed President Robert Kaplan: “It would be my view that if the economy unfolds between now and our September meeting … if it unfolds the way I expect, I would be in favor of announcing a plan at the September meeting and beginning tapering in October.”
• Richmond Fed President Thomas Barkin:“We are closing in … I don’t know exactly when that will be. When we do close in on it I am very supportive of tapering and moving back toward a normal environment as quickly as the economy allows us.”