Powell and Biden, tied at the hip — But could Fed chair be an inflation scapegoat? — Volatility poised to return

From: POLITICO's Morning Money - Thursday Jul 01,2021 12:04 pm

Jul 01, 2021

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Quick Fix

Powell and Biden, tied at the hip — Via our Victoria Guida, with a small MM assist, on how Fed Chair Jay Powell and President Biden’s futures are largely intertwined (though Powell’s future in his job depends on his renomination by Biden early next year):

“Powell, who worked in the George H.W. Bush administration and was elevated to central bank chief under President Donald Trump, has been the strongest voice in reassuring financial markets and Congress that higher prices will ease as the economy fully emerges from the pandemic.

“That stance puts Powell in lockstep with the White House , which could smooth his path to reappointment by Biden, a pivotal decision that’s due in the coming months. Either way, Biden’s political fate is intricately tied to whether Powell is right, since the president's sweeping recovery plans depend on the Fed striking the right balance between a growing economy and controlling inflation.”

Treasury Secretary Janet Yellen, Powell’s predecessor at the Fed , has echoed the central bank chief’s argument, and she will be crucial to the debate over whether to appoint him, according to a senior White House official.”

But could Powell be a fall guy? — Richard Bernstein of RBAdvisors emails MM on how the White House could handle things if Powell turns out to be wrong about inflation: “Higher-than-expected inflation gives the Biden team a chance to fire Powell and distance the administration from inflation.

“The line could be he was Trump’s choice for Fed Chair and he has already hindered the recovery with higher inflation. If they appoint a new Chair and inflation continues to rise…it’s Powell’s fault ... If inflation comes down, then the new Chair was responsible for whatever reason. But, by continuing to hang on to Powell, the Biden economic team increasingly owns inflation.”

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Driving the Day

President Biden heads to Surfside, Florida to meet with first responders, speak with victims’ families and deliver remarks following the condo collapse that has claimed 18 lives so far … Initial jobless claims at 8:30 a.m. expected to dip back to 380K from 411K … ISM manufacturing at 10:00 a.m. expected to dip to 61.0 from 61.2 …

YES, THERE IS ANOTHER INFRASTRUCTURE BILL — Our Sarah Ferris and Sam Mintz: “House Democrats … are taking an early victory lap for their massive infrastructure bill that would spend hundreds of billions on roads, bridges, transit and rail. No, not the one you're thinking of. House Speaker Nancy Pelosi's caucus is preparing to pass a $715 billion transportation package this week — perhaps even with a handful of Republicans — that would spend big on areas that are also centerpieces of … Biden’s infrastructure push. …

“As top Democrats pitch a dual-track approach to infrastructure — a bipartisan deal alongside a monster party-line plan that goes beyond just roads and bridges — some Democrats are arguing that the transportation bill could present a new, third lane.

"Pieces of the bill set to pass the House Thursday might have a better shot at becoming law as the infrastructure drama wobbles forward, some Democrats say, given that it comes with a Sept. 30 deadline to extend key surface transportation programs.”

WARREN WANTS CFTC TO PROBE GOOGLE — Our Kellie Mejdrich: “Sen. Elizabeth Warren has asked the CFTC to investigate whether Google manipulated the online advertising market, in a bid to recruit a key Wall Street regulator to crack down on Big Tech.

“The Massachusetts Democrat told CFTC Acting Chair Rostin Behnam in a letter released Wednesday that the agency, which primarily focuses on policing financial derivatives contracts linked to commodities, likely has authority to regulate digital advertising. … Warren urged Behnam to look into Google's "Project Bernanke," in which the tech giant allegedly used customer data from the ad exchange it operates to give its own ad-sales tools an advantage in auctions.”

Markets

S&P 500 FLIRTS WITH RECORD HIGH AS MONTH, QUARTER DRAW TO A CLOSE – Reuters’ Stephen Culp: “Wall Street was muted on Wednesday and the S&P teased its fifth straight record closing high as investors ended the month and the quarter by largely shrugging off positive economic data and looking toward Friday's highly anticipated employment report. The indexes were languid and range-bound, with the blue-chip Dow posting modest gains, while the S&P 500 and the Nasdaq stayed relatively close to the starting gate.”

VOLATILITY IS POISED FOR A COMEBACK — Bloomberg’s Joanna Ossinger: “Volatility retreated across asset classes in the first half of the year as developed nations emerged from the worst of the Covid-19 pandemic. Its potential return may not mean the end of good times for risk assets.

“The Cboe Volatility Index, or VIX, has fallen more than six points this year, close to a 16-month low, while the Cboe High Yield Corporate Bond ETF Volatility Index closed at its lowest level since January 2020 on Tuesday, sent lower by central bank largesse and progress against the coronavirus.”

TREASURY YIELDS SIGNAL INVESTORS’ WANING ECONOMIC EXUBERANCE — WSJ’s Sam Goldfarb: “The recent drop in U.S. Treasury yields reveals some investors’ doubts about how strong the economy will be in the coming years, even as inflation pushes to its highest level in more than a decade.

"Yields, which fall when bond prices rise, have surprised many by sliding in the second quarter of the year. That marks a reversal from the sharp rise of the year’s first three months, when markets generally rode a wave of optimism that stimulus and reopenings would spur a roaring ’20s type of acceleration.”

Fly Around

ROBINHOOD PAYS $70M TO SETTLE RANGE OF ALLEGATIONS — AP’s Stan Choe: “Robinhood Financial will pay nearly $70 million to settle a wide range of allegations, including that it gave customers misleading information and improperly allowed some users to make riskier trades after they lied about their trading experience.

“The financial penalty is the largest ever ordered by the Financial Industry Regulatory Authority, a non-governmental organization that oversees the brokerage industry, and one that ‘reflects the scope and seriousness of Robinhood’s violations,’ said Jessica Hopper, head of FINRA’s department of enforcement.”

INFLATION EATS AT SURGING U.S. PAY — Bloomberg’s Katia Dmitrieva: “Americans are enjoying outsized pay boosts this year from desperate employers, but the raises are failing to keep pace with surging prices for everyday goods.

"U.S. wages likely posted a third strong monthly gain to fuel a 3.6 percent increase in June from a year earlier, according to economists’ forecasts ahead of the Labor Department’s jobs report due Friday. Companies including FedEx Corp. and Olive Garden owner Darden Restaurants Inc. are raising wages to attract staff.”

And the Fed’s unity is cracking — NYT’s Jeanna Smialek and Jim Tankersley: “Federal Reserve officials spoke with one voice throughout the pandemic downturn, promising that monetary policy would be set to full-stimulus mode until the crisis was well and truly behind America. Suddenly, they are less in sync.

“Central bankers are increasingly divided over how to think about and respond to emerging risks after months of rising asset values and faster-than-expected price increases. While their political counterparts in the White House have been more unified in maintaining that the recent jump in price gains will fade as the economy gets past a reopening burst, Washington as a whole is wrestling with how to approach policy at a moment of intense uncertainty.”

RENT CATCHES UP TO PRE-PANDEMIC ESTIMATES, EXCEPT IN BIG CITIES — Bloomberg’s Marie Patino: “As the first Covid-19 lockdowns began in the U.S. last year, the cost to rent a place in San Francisco began plunging. By December, prices were down 35 percent year over year as those able to work remotely moved to smaller cities and suburbs nearby.

“Even more than a year later, the gap in the city between actual rent prices and pre-pandemic projected rent prices — representing what prices would look like if they had followed their historical course — remains the highest in the country, according to new research published by real estate aggregator Apartment List. In San Francisco, actual June 2021 rents are still 16.2 percent lower than their pre-pandemic projections."

KAPLAN SAYS TIME TO START PARING BOND BUYING AID SOON — WSJ’s Michael S. Derby: “Federal Reserve Bank of Dallas leader Robert Kaplan reiterated Wednesday his view that it will soon be time for the U.S. central bank to slow the pace of its $120 billion a month in bond buying stimulus, a process he expects to go smoothly. ‘I think it would be far healthier to start soon, and sooner rather than later’ on slowing the asset purchases, Mr. Kaplan said on Bloomberg’s television channel.”

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