Tapering of asset purchases could start as soon as this year, says Fed’s Daly
Top central bank official points to strong recovery in US economic activity and consumer spending
The Federal Reserve could start dialling back its ultra-accommodative monetary stimulus by the end of the year, given the strength of the economic rebound, according to a top official at the US central bank.
In an interview with the Financial Times, Mary Daly, president of the San Francisco Fed, expressed confidence that the robust recovery in household and business activity from the depths of the Covid-19 collapse would continue to gather momentum as more people returned to the workforce and consumer spending remained buoyant, setting the stage for a policy pivot in the coming months.
“I remain very optimistic and positive about the fall and ongoing improvements in the key variables we care about,” she said on Wednesday. “That for me means it’s appropriate to start discussing dialling 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.
“Talking about potentially tapering those later this year or early next year is where I’m at,” said Daly, who has long been one of the more “dovish” members of the Fed advocating for a patient approach to withdrawing support.
The Fed has said it would continue buying $120bn of agency mortgage-backed securities and Treasuries each month until it achieved “substantial further progress” on its goals of 2 per cent inflation on average and maximum employment.
Daly, who is a voting member on the policy-setting Federal Open Market Committee, said that those thresholds would likely be met by the end of the year or early on in 2022.
Her comments followed another elevated inflation reading on Wednesday, which showed year-on-year price gains were holding steady at 5.4 per cent, even though the increase from last month registered a more moderate pace. Some sectors more sensitive to pandemic disruptions saw slower price rises than in previous months, too.
The labour market has also made significant strides, with 943,000 jobs added in July. The unemployment rate ticked down to 5.4 per cent from 5.9 per cent in June.
“We’re really adding enough jobs to see that we’re making progress towards our full employment goal,” said Daly. “We’re not there yet . . . [but] we’re chipping away at the hole that was dug by Covid.”
Nearly 6m more Americans remain out of work than in February 2020. Daly said she expected the shortfall would shrinks as pandemic fears faded, childcare issues were resolved and enhanced unemployment benefits were phased out.
The improving economic backdrop has catalysed a vigorous debate among Fed officials about the appropriate pace to remove its support. The past week has marked a turning point, with a growing number of central bankers making the case for a swifter retreat from financial markets than many initially expected.
On Wednesday, Esther George, president of the Kansas City Fed and who will be a voting member of the committee in 2022, said it was time to “transition from extraordinary monetary policy accommodation to more neutral settings”.
“While recognising that special factors account for much of the current spike in inflation, the expectation of continued strong demand, a recovering labour market and firm inflation expectations are consistent, in my view, with the committee’s guidance regarding substantial further progress toward its objectives,” George said at a seminar organised by the National Association for Business Economics. “I support bringing asset purchases to an end under these conditions.”
Her views align closely with those of James Bullard, president of the St Louis Fed, and Robert Kaplan of the Dallas Fed, who said in an interview with CNBC on Wednesday that he supported announcing in September that tapering would begin in October. That is also in line with the timeline put forward by Fed governor Christopher Waller earlier this month, so long as upcoming jobs data remain solid.
Raphael Bostic from the Atlanta Fed, Eric Rosengren of the Boston Fed and Thomas Barkin, Richmond Fed president, also weighed in this week, each making the case that inflation was already where it needed to be in order to begin winding down bond purchases.
The principal risk to the outlook, according to Fed officials, is the alarming spread of the more contagious Delta coronavirus variant — although Daly said it was likely to have a limited economic impact.
“Overall, I don’t think it will derail our recovery,” she said.
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Power, private equity and European football
The last time DD checked in on CVC Capital Partners’ attempt to buy a stake in Spain’s top football competition La Liga, things weren’t looking easy for the private equity firm.
CVC had knowingly placed itself at the centre of a long-running power struggle between the league and two of its top clubs, Real Madrid and Barcelona, not long after they tried to break away into a European Super League.
Unsurprisingly, the two clubs were unhappy about what they saw as a backroom deal between the league and a group of financiers. Since then, Real Madrid has threatened legal action to block any deal.
Barcelona, which has just lost its star player Lionel Messi, centre, accuses CVC of underpaying © Reuters
The row is due to come to a head on Thursday, as La Liga’s 42 clubs vote on the proposal. CVC needs 32 votes and knows that this part is tricky: a lack of support from clubs is what caused private equity deals with Italy’s Serie A and Germany’s Bundesliga to fall through this year.
But La Liga is sounding confident. “We are going to have a big majority,” José Guerra Álvarez, corporate managing director at La Liga, told the FT’s Sam Agini in this story alongside DD’s Kaye Wiggins.
Even CVC, which hardly ever makes public comments on its deals, especially when they’re at a sensitive point, is being punchy: it said this week that Real Madrid’s planned legal action was “totally disproportionate and unfounded”.
La Liga has brought in Rothschild & Co, which has produced a report that favours its case, saying the offer is “fair from a financial point of view”. Barcelona had previously said CVC was underpaying.
The Rothschild report contains some new insights on how the deal will work.
CVC (which is using a €1bn loan from Goldman Sachs, per Reuters) would pay about €100m for a minority stake in a company holding La Liga’s broadcasting and sponsorship rights.
It would also contribute €2.5bn to La Liga, to be shared between its clubs.
In return CVC would be entitled to an 11 per cent share of revenues for the next 50 years. The clubs would get the €2.5bn in the form of “shareholder loan notes”, essentially interest-free loans that would mature in 40 to 50 years.
Will the clubs think it’s a fair price? It’s “not straightforward” to find a comparable group of companies from which to assess CVC’s valuation of La Liga at 15.1 times 2021 earnings, the Rothschild bankers note.
A group of premium content companies including Netflix and Disney was valued at almost 22 times earnings, they said. And a group of sports companies including Formula One and the Madison Square Garden Company was valued at 33.4 times.
But because Europe’s other football leagues have rejected CVC’s approaches, it’s hard to know for sure.
The indoor farming Spac that bit off more than it could chew
Plus, crunch time for a European football deal
AppHarvest: growing pains
Few businesses can bring together the US domestic goddess Martha Stewart, hedge fund veteran Jeff Ubben and Hillbilly Elegy author JD Vance. Who would’ve thought it would be tomatoes?
They’re all early backers of AppHarvest, a start-up that runs America’s largest hydroponic greenhouse, otherwise known as vertical farming.
The Kentucky-based company took a bit of a bruising on Wednesday, to say the least.
AppHarvest founder and CEO Jonathan Webb © Financial Times
Shares in AppHarvest, which became a listed company earlier this year through a deal with a special purpose acquisition company, fell by as much as 40 per cent following news that it wouldn’t meet the projections it made a few months ago.
Even before the company had harvested its first tomato, AppHarvest announced plans to go public through a deal with Novus Capital Corporation at a $1bn valuation. This was in September, the heady days of the Spac boom when companies were clinching deals to go public at a rapid pace and lofty valuations. The FT’s Lex column pointed out at the time that it was perhaps too early for a listing.
While AppHarvest was yet to open its doors to its first greenhouse, it projected $21m in revenue for this year, which would shoot up to $387m in 2025, in a glossy presentation to investors. Shares rose as high as $40 after it listed in February, earning the company a $3.5bn valuation.
But as FT Alphaville’s Jamie Powell points out, those numbers have now been revised down significantly: “The company adjusted its full-year 2021 net sales outlook to the range of $7m to $9m from a prior range of $20m to $25m.” Its losses are also higher than expected — from $48m to $70m.
One of the main perks of going public through a Spac, instead of a traditional initial public offering, is the ability to make projections about the company’s growth.
Businesses that choose an IPO aren’t prohibited from doing the same but there are serious liability risks with doing so, hence a “quiet period” ahead of the listing.
While the Securities and Exchange Commission was largely silent on the issue for much of the boom period, it has recently warned companies that it will closely scrutinise projections.
AppHarvest is standing by its 2025 outlook, which strikes DD as odd given how much it has missed the mark so far in 2021. According to the presentation, it will have 12 facilities in the next four years capable of producing tomatoes, cucumbers and leafy greens.
Let’s hope it can produce the kind of green investors like, as well.
Closing Stock Market SummaryThe S&P 500 (+0.3%) and Dow Jones Industrial Average (+0.6%) set intraday and closing record highs on Wednesday, as value/cyclical stocks continued to sport a bullish bias following a better-than-feared Consumer Price Index (CPI) report for July.
The Russell 2000 increased 0.5% after being down as much as 0.8% intraday. The Nasdaq Composite, however, declined 0.2% along with the Russell 1000 Growth Index (-0.2%).
Specifying the data, total CPI increased 0.5% m/m in July, as expected, while core CPI, which excludes food and energy, increased 0.3% m/m (Briefing.com consensus 0.4%). On a year-over-year basis, total CPI was unchanged at 5.4% and core CPI moderated to 4.3% from 4.5%.
The data supported the narrative that inflation rates are peaking, yet the inflation-sensitive 10-yr yield was trading higher for the sixth straight session after the report. It took a very strong 10-yr note auction to bring it back down to its unchanged mark of 1.34% after it traded at 1.37% intraday.
Some rate discomfort might have contributed to the underperformance of the growth stocks, but a willingness to stay invested helped money flow into the value/cyclical stocks. The S&P 500 materials (+1.4%), industrials (+1.3%), and financials (+1.2%) sectors increased by at least 1.0% on Wednesday.
Interestingly, the health care sector (-1.0%) was the only sector in the S&P 500 that closed lower, largely due to weakness in Pfizer (PFE 46.31, -1.88, -3.9%) and Moderna (MRNA 385.33, -71.43, -15.6%). MRNA pulled back 15.6% after doubling between July 9 and August 9. PFE gained about 20% over the past month.
Southwest Air (LUV 51.84, +0.73, +1.4%) issued downside Q3 revenue guidance as the Delta variant caused a deceleration in close-in bookings and an increase in close-in trip cancellations this month. LUV and other airline stocks still posted decent gains, as the news may have been expected since airline share prices had struggled since June.
Separately, Kansas City Fed President George (2022 voter) and Dallas Fed President Kaplan (2023 voter) suggested the Fed should consider tapering asset purchases sooner rather than later, echoing comments from Atlanta Fed President Bostic (2021 voter) and Boston Fed President Rosengren (2022 voter) earlier this week.
The 2-yr yield decreased two basis points to 0.21%. The U.S. Dollar Index decreased 0.2% to 92.90. WTI crude futures rose 1.4%, or $0.94, to $69.27/bbl.
Reviewing Wednesday's economic data:
- Total CPI, driven by increases in the indexes for shelter, food, energy, and new vehicles, increased 0.5% month-over-month in July, as expected, while core CPI, which excludes food and energy, rose 0.3% (consensus 0.4%). On a year-over-year basis, total CPI was unchanged at 5.4% and core CPI moderated to 4.3% from 4.5%.
- The key takeaway for the market is the moderation in the year-over-year readings, which feeds into the "peak inflation" narrative. That is, the stock market is taking some comfort in the notion that inflation pressures might not be as pronounced in coming months.
- The Treasury Budget for July showed a $302.1 bln deficit, versus a $63.0 bln deficit in the same period a year ago. The budget data is not seasonally adjusted, so the July deficit can't be compared to the June deficit of $174.2 bln.
- July marked the 22nd consecutive month that the Treasury has seen a budget deficit.
- The weekly MBA Mortgage Applications Index increased 2.8% following a 1.7% decline in the prior week.
Looking ahead, investors will receive the Producer Price Index for July and the weekly Initial and Continuing Claims report on Thursday.
- S&P 500 +18.4% YTD
- Dow Jones Industrial Average +15.9% YTD
- Nasdaq Composite +14.6% YTD
- Russell 2000 +14.0% YTD
After Hours Summary: OPEN +20%, HIMS +12% rise while LFST -23%, DIBS -19% decline after earningsAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: OPEN +19.7%, HIMS +11.5%, FOSL +10.9%, SONO +9.6%, MSP +7.6%, CLOV +6.9%, RIDE +5.7%, APP +3.1%, DM +1.7% (also agreed to acquire ExOne [XONE]), ROOT +0.9% (also announced partnership with Carvana [CVNA] for auto insurance solutions), NIO +0.8%, BMBL +0.7%
Companies trading higher in after hours in reaction to news: XONE +39.3% (agreed to be acquired by Desktop Metal [DM]), TPTX +13.1% (received sixth regulatory designation for repotrectinib from the FDA), XERS +8.5% (announced FDA acceptance of IND application for XeriSol levothyroxine for hypothyroidism), NVVE +3.5% (expanded partnership with Blue Bird [BLBD] for electric school buses), CCCC +1.6% (received FDA orphan drug designation for CFT7455 for treatment of multiple myeloma)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: LFST -23.0%, DIBS -19.1%, CPNG -12.7%, MQ -8.9%, RXT -6.7%, MTTR -4.9%, GOCO -4.5%, BLNK -3.9%, FOA -3.3%, ARRY -3.2% (also entered into agreement for capital commitment from Blackstone), AMWL -2.6%, VRM -1.2%, EBAY -0.9%
Companies trading lower in after hours in reaction to news: FSR -4.6% (announced Green Convertible Senior Notes offering), OMF -2.7% (announced secondary public offering), PTRA -1.8% (signed long-term supply agreement with LG Energy Solution for EV battery cells), DEA -1.8% (announced public offering), CWK -1.8% (announced secondary public offering)