The market eked out a gain last week, in spite of the default threat of Evergrande, the FOMC announcement on asset tapering to begin “soon,” potentially weakening housing market data, and all the uncertainty around the nation’s debt ceiling. Catch all the details below for this week’s Monday market update or listen on this week’s episode of Finance Explained.
Last Week in the Market
Last week, after a rough start on Monday following the news of the looming Evergrande default, the market rallied later in the week following the Fed’s announcement that it would begin winding down its accommodative monetary policy actions sooner than previously anticipated, beginning with tapering off asset purchases “soon,” likely following their November meeting.
The market finished last week up +0.5%, breaking the September trend of losses, but remains down nearly 1.5% for September (and more through the end of Monday).
Bond yields also rallied late in the week, ending the week at 1.456%, driven by both the Fed’s announcement, as well as concerns around the national debt ceiling. Congress must act to either increase or temporarily suspend the debt ceiling or the country may default on the national debt, which would create a whole host of financial market turmoil. The federal government faces a potential looming shutdown to conserve funds until Congress can reach an agreement, if something is not passed by September 30, 2021. Additionally, Congress is still debating the Senate’s $3.5 trillion budget reconciliation bill (which some experts peg at costing as much as $5.5 trillion).
In addition to the FOMC statement and the ongoing debates in Congress, last week we also got data on:
- August Housing Market – New Housing Starts and Existing Home Sales
- Weekly Jobless Claims for the week ended September 11, 2021
More on all these stories below or get the full update on this week’s episode of Finance Explained.
FOMC Statement: Tapering to start “soon”
The Federal Open Market Committee regularly meets 8x a year to evaluate the state of the economy, and discuss any necessary changes to monetary policy – aka interest rates and ongoing asset purchases intended to support market function and the flow of credit to businesses and households.
Investors’ ears were all on the Fed last week, as they released their statement following their most recent FOMC meeting. These statements are fairly formulaic, and use the same verbiage from meeting to meeting, so investors closely scrutinize them for any slight changes in wording for clues on when and how soon the Fed will make changes to their monetary policies.
Since last December, the Fed has been purchasing $120 billion EVERY MONTH in Treasuries and mortgage-backed securities… and for perspective, the Fed balance sheet has more than DOUBLED in size since the end of 2019, increasing from $4.2 trillion to more than $8.5 trillion. That’s an extra $4.3 trillion dollars added to the economy… (and we wonder why there are more dollars out there chasing fewer goods and driving inflation.)
Related Post: 5 Factors Driving Higher Inflation
Some of you asked where the Fed gets the money to make these asset purchases. The truth is they create new money. This is the modern day equivalent of “printing money.” They create new money and use it to purchase Treasury bonds and mortgage backed securities (MBS) on the open market – they can buy it directly from the US government who is constantly issuing new Treasury bonds to pay the bills, or they can buy bonds from banks. Either way, they put the new money into circulation through these purchases. Then the government uses the money to fund its spending, or banks use it to make more loans and investments.
Based on their statement last week, it sure sounds like they plan to start pulling back and reducing those asset purchases and balance sheet expansion soon, though they are holding interest rates as is for now.
Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals. If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.FOMC September 22, 2021 Official Statement
That last sentence is new relative to the prior meeting’s statement. In subsequent Q&A during the press conference, Fed Chair Jerome Powell indicated “soon” to mean after their next FOMC meeting, scheduled for November 2-3, 2021. This is good because it means that they see the economic recovery progressing – GDP is growing, unemployment is falling.
Every other meeting, the Board of Governors also puts forth their projections for GDP, unemployment, inflation and when they expect to start raising interest rates. They predict above-average GDP growth to continue in 2022, full employment to be achieved over the next year, and inflation to continue to trend above their long-term target through for the next 2 years. So much for it being transitory…
Given that outlook, more FOMC members also want to raise interest rates as soon as next year, which is sooner than previously predicted, but necessary given their outlook for continuing inflation. You can see their “votes” in the dot plot below. There are now 9 members who expect to raise rates in 2022 vs. just 7 following June’s meeting.
What impact do these actions have on your personal finances? Both asset purchase tapering, or reducing the amount of new money created and used to buy bonds in the open market, and increasing the Fed funds rate have the same impact on interest rates – they make them go up. When the Fed acts as a big buyer in the bond market, it increases demand for bonds, pushing the price of bonds up and the market interest rate down. By acting as a big buyer of mortgage backed securities, they have held mortgage rates lower than they otherwise would be. The Fed currently holds 22% of all MBS outstanding and 25% of all public Treasury bonds on its balance sheet. That’s not just a big buyer – it’s a massive buyer.
Higher interest rates increase borrowing costs, thus reducing borrowing, slowing demand, and hopefully, price growth too. It’s a way to start to tap the breaks and hopefully help price increases cool down. Think of it this way – if it costs your mortgage costs you 3.5-4% vs. 2.8% today, how does that change the price you might pay for a house?
Next Data Point?
Fed Chair Jerome Powell is testifying before Congress this week
Next FOMC meeting is November 2-3, 2021
August Housing Market: Signs of Softening or Seasonality?
We got two data releases last week on the August housing market that caused many to question whether the housing market may be softening – not declining, just not as overheated as it has been for the last year or more.
First, new housing starts. Housing starts were up +3.9% vs. July, and up more than +17% vs. August 2020. However, inventories, or new home supply, has started increasing and currently sits at 6.2 months worth of inventory. This is consistent with a more normal market.
Related Post: Is this a Good Time to Buy a House?
In recent months, we have finally seen housing starts at levels at or above the historical long-term median of 1.5 million starts. Following the 2008 financial crisis, which saw years of over-building, we have now under-built for more than a decade. This has led to a general housing shortage, which is contributing to higher home prices overall.
Additionally, rising inflation, especially in building materials, as well as overall housing shortage, has resulted in very few new homes being built at lower and entry-level price points. This has driven new home median prices up over 18% vs. a year ago.
On the existing home sales front, for August, we saw actual homes sold down 2% vs. July, but home prices still remain up nearly 15% vs. last year. Some are pointing to this decline in sales as a sign the market is softening – however, listings are down double-digits vs. last year, leaving supply at extremely low levels. A normal market is considered enough listings to cover 4-6 months of sales, and currently, there is just 2.6 months worth of supply.
Additionally, some pointed to the declining median sales price in August relative to the month prior, as a sign of market softening. However, it is important to note that while units sold are seasonally adjusted, the median price is not. Historically, the market always slows down a bit as we head into the Fall and Winter months. Most house hunters want to be settled before the start of the school year, so we tend to see pricing stabilize over those months before the Spring selling season kicks off again.
So is the housing market softening? Or is it just seasonality? Only time will tell.
One other important thing to keep in mind with the housing market is mortgage rates. Mortgage rates remain near all-time historic lows. However, their spread – how much higher they are – relative to long-term Treasury bonds has returned to more normal levels, and treasury rates are highly likely to start rising, driven both by actions of the Federal Reserve, as well as the potential for increased spending by the Federal government.
Historically, rising mortgage rates have caused the real estate market to soften, as it increases mortgage payments for the same priced home.
Next Data Point?
New Home Starts for September will be released October 19th
Existing Home Sales will be released October 21st
Mortgage rates are released every Thursday by Freddie Mac
Weekly Jobless Claims for 9/18/2021: 351,000 new claims
Weekly jobless claims increased last week, after trending down for the last several weeks.
For the week ended September 18th, new initial jobless claims were 351,000. Continued claims for the week ended September 11th also increased to 2.8 million, a 2.1% insured unemployed rate, an increase of 0.2% from the week prior.
We did see close to zero initial claims under the Federal Pandemic Unemployment Assistance program – new claims can still come in for weeks of job loss prior to the September 4th cut-off date, which accounts for the small number of claims we may still see going forward.
Insured unemployment and continuing claims under all programs comes at a 2 week lag, so this data is through September 4th, right up to the end of the federal programs. At that point in time, 80% of continued claims benefits were under the Federal PUA (for those who may not previously have been eligible for state benefits, like self-employed and 1099 workers) and PEUC (for workers who have exhausted the max weeks of benefits under state programs) programs.
Next week, in Thursday’s weekly jobless claims data, I expect to see those continued claims completely disappear from this data for the week ending September 11th. Keep in mind, this doesn’t been people have gone back to work – just that their weeks of eligibility have ended. In addition, remember that the additional $300 per week of federal unemployment benefits has ended for everyone – even if they are still receiving state benefits.
Next Data Point?
Weekly jobless claims are released by the Dept. of Labor every Thursday
Political Update: The Debt Ceiling and the $3.5 Trillion Spending Bill
In testimony before Congress today, Treasury Secretary Janet Yellen gave the estimated deadline on raising the debt ceiling: October 18th. If Congress fails to pass either a temporary suspension of or raise the debt ceiling, the Treasury will likely be out of money to pay its bills by this date and could default on its existing debt obligations. It is already using “extraordinary measures” to limit expenditures in order to prolong this deadline.
What exactly is the debt ceiling?
The first debt ceiling was put in place by Congress in 1917. Prior to that point, Congress would have to authorize each and every single bond issue via a legislative along with the amount. The debt ceiling was put in place to allow the Treasury to issue bonds, up to a certain limit, to fund the needs of the government. It was created to make government more efficient!
The debt ceiling has been raised upwards of 90 times since 1917, but in more recent decades has become more of a partisan debate when it has to happen. It essentailly gives both parties the opportunity to try to demand what they want in order to get the ceiling raised and avoid default, while they hold the American public hostage with the threat of default and/or a government shutdown in the interim.
The current debt ceiling, set in March 2019 was $22 trillion. However, as has been done before, the ceiling was temporarily suspended in August 2019 – even before the pandemic began – during the Trump administration by a bipartisan, but mostly Democrat, vote. The suspension was in place through July 2021, during which time any debt amount could be added. Once it expired in July, however, the debt ceiling becomes the old ceiling – $22 trillion – plus any debt issued during the suspension – $6.5 trillion – for an effective debt ceiling currently of $28.5 trillion.
We are now at that level of national debt, which requires the Treasury to enforce “extraordinary measures” to limit additions that would count towards the debt ceiling limit.
What is the debate about?
The Biden administration is adamant that the debt ceiling is a bipartisan issue, meaning he wants Republicans to vote and be on board with raising it. They argue it is a bipartisan issue because the debt funds spending Congress has already approved.
Republicans, however, are linking raising the debt ceiling to the new, large spending bills the Biden Administration is currently trying to pass on a largely non-bipartisan basis: the $3.5 trillion budget reconciliation bill currently before the Senate, which has no Republican support, and a smaller $1 trillion infrastructure bill, that after many negotiations has some bipartisan support.
Republican Senator Mitch McConnell has said, ““Democrats control the Senate, the House, and the White House. If they want to ram through another reckless taxing and spending spree that hurts working families and helps China without any Republican input, they will need to raise the debt limit on their own.”
Some pundits debate whether or not the debt ceiling should exist at all. If Congress already authorized the spending, why limit it from being spent? Others argue the debt ceiling is the only measure of accountability on Congress’ spending.
Legislation is passed with predictions about how much it will cost and how much revenue it will bring in, but when, other than in debate over the debt ceiling, do we ever look back and see how those predictions played out? Historically, raising the debt ceiling has often been paired with deficit reduction efforts.
$3.5 Trillion Budget Reconciliation Bill
Separate from the debt ceiling debate, though it is being pulled into those discussions, is the currently proposed $3.5 trillion spending bill before the Senate in the form of a Budget Reconciliation bill.
This is largely Biden’s American Families Plan. The text of the Budget Reconciliation bill as currently written provides very little in the way of specifics – it’s more a list of dollar amounts by year apportioned to various committees. Those committees then write bills as to how they will spend the money once approved. A Democrat Senators memo from August 2021 gives a rough budget resolution framework as to what the spending is supposed to be for. More than half – $1.8 trillion – is designated for working families, including tax cuts for those making under $400,000, the elderly and climate change. There’s over $100 billion for immigration, granting lawful permanent status for qualified immigrants. Over $700 billion is designated for Health, Education, Labor and Pensions, which includes initiatives like universal preschool, affordable childcare for working families, and tuition-free community colleges.
And it’s all proposed to be funded by the tax hikes we discussed last week – raising taxes on corporations and those earning more than $400,000.
The alleged $3.5 trillion spending bill projects the national debt to hit more than $45 trillion by 2031, a 57% increase over the next 10 years. For perspective, that’s almost the size of the entire US bond market currently, which includes all the national debt plus all the debt issued by corporations today. It’s bigger than the entire market cap of the S&P 500, which is currently $38.2 trillion. It’s more than double the current GDP. And even if the government decided to seize the entire wealth of all the billionaires in the US, it would only amount to $4.8 trillion – which just covers one year of proposed spending under the proposed budget reconciliation.
We also don’t yet have the Congressional Budget Office’s analysis of what these proposals will truly cost… some experts peg the cost at something upwards of $5.5 trillion.
Good news on the pandemic front continues. New cases are down over 30% since the start of September, with new daily deaths beginning to decline now as well. The rate of hospitalizations and deaths, relative to new cases, also continues to decline.
Vaccinations also continue to increase, albeit more slowly than last spring. Currently, over 75% of those over the age of 12 (the eligible population) have received at least 1 dose.
Recent increases in vaccine mandates for federal and state employees, as well as a new federal rule proposed by President Biden and to be enforced by OSHA calls for all businesses with more than 100 employees to require vaccinations. Last week, a consumer brands group, which represents thousands of companies, sent President Biden a letter with a laundry list of questions on how this rule will be implemented and enforced. In addition, 24 state attorney generals, from Republican states, have threatened legal action against the vaccine mandate. We are still waiting on the official language of the rule from OSHA.
Earlier this month, the FDA recommended against the widespread use of boosters, agreeing only to distribute them to people ages 65 and up as well as those at high risk of severe illness. Last week, the CDC issued their guidance on boosters, recommending them for those 65 and up, those with underlying medical conditions, as well as a third group – those who are at increased risk for COVID-19 exposure and transmission because of occupational or institutional setting, such as doctors, nurses, teachers or prison workers. At this point, boosters are only available for those who received the Pfizer vaccine, and it must have been at least 6 months since your second shot.
Next Data Point?
CDC tracks and reports pandemic data daily via the CDC Covid Data Tracker
The Chinese government has not said much, and Evergrande has said it has settled some immediate debt obligations in “private negotiations.” The Chinese central bank has injected significant capital into its financial markets to calm liquidity concerns, and some local Chinese governments have reported taking over local Evergrande properties.
If you would like to learn more, last week’s Indicator by Planet Money podcast also shared some interesting anecdotal stories about Evergrande’s business model, like how they demolished ghost towers – apartments they built with 100s of units, funded by debt, that never sold and sat empty for years.
This week in the markets, we will continue to watch the progress in Congress on the debt ceiling and the Senate’s budget reconciliation, aka the $3.5 trillion spending bill. On the economic front, we will get weekly jobless claims, as well as the Personal Income and Consumer Expenditures data for August, which also includes the Fed’s favored measure of inflation, the PCE Price Index.
Questions about this week’s update or recent financial headlines? Tune in to Live Q&A with Family Finance Mom every Monday and Wednesday at 9AM ET on Instagram. Look for the question box in stories to leave your questions, or watch and ask them live.