Last week the focus was squarely on monetary policy, as the Federal Reserve met to consider when to begin winding down its bond buying program. And while it chose to put off the decision, it sent a clear message that is prepared to make such an announcement in November. Chairman Powell went so far as to say the Fed is targeting cessation of the program by the middle of next year if the economy progresses as anticipated. In addition, fully half of the meeting participants indicated that the first hike in the anticipated upcoming rate cycle could occur in 2022. Stocks rallied after the Fed meeting on Wednesday, reversing declines from earlier in the week on jitters related to credit issues in China and the breach of technical support the previous Friday. For the week, the S&P 500® index gained 0.5 percent, halting a two-week slide that took the index lower by 4.0 percent from its September 2nd high. Despite the slightly more hawkish policy outlook, investors took comfort in the Fed’s constructive view on both the economy and inflation. Intermediate bond yields climbed sharply as well. The yield on the ten-year Treasury note soared through resistance, climbing from 1.30 percent prior to the meeting to end the week at 1.45 percent. And, as this week gets underway, is trading at 1.48 percent, its highest level since late June.

Fiscal Policy Takes Center Stage this Week

This week, the focus will be squarely on fiscal policy, as Congress confronts a range of urgent legislative challenges. The federal fiscal year ends on Thursday, and Congress must pass new funding or risk a government shutdown. Separately, the Treasury Department has warned that the government’s borrowing authority is expected to run out some time in October, raising the possibility of default if additional borrowing authority is not authorized. At the same time, the House is expected to vote on the $1 trillion infrastructure bill that has already passed the Senate.

Progressive Democrats in the House have threatened to derail its passage unless a vote on the President’s $3.5 trillion social infrastructure bill comes first, despite less than full support for a bill of that size in either chamber. Expect authorization to keep the government operating, at least temporarily, as neither party wants to get blamed for a shutdown. The same is true ultimately for the debt ceiling extension, despite the political brinksmanship. The intra-party division among Democrats is more problematic, but Speaker Pelosi has indicated that the $1 trillion bill will be put to a vote sometime this week, and that the $3.5 trillion bill will assuredly be trimmed in size as negotiations continue.

Economic Activity Strengthens as the Delta Variant Infections Slow

In its meeting statement on Wednesday, the Fed said, “With progress on vaccinations and strong policy support, indications of economic activity and employment have continued to strengthen…The path of the economy continues to depend on the course of the virus.” And the news here is encouraging. After rising steadily throughout July and August, the seven-day moving average of new infections has been in a declining trend. On September 1 the seven-day average stood at 166,000 new cases. As of the 26th it had fallen to 120,000. The CDC now reports that 64 percent of the population has received at least one dose of vaccine, as has 75 percent of the population 12 years old and above. The trend globally has been in a similar decline since the start of September. However, the impact on economic activity continues to be felt in supply chain disruptions, travel hesitancy, and mobility restrictions.

Although third quarter GDP estimates have been lowered throughout the quarter as the Delta variant took its toll, those estimates have leveled off more recently, following the cautiously encouraging trend in new infections, and some recent encouraging economic data. The Atlanta Fed GDPNow forecast has leveled off at 3.7 percent since the start of September, after beginning August at 6.3 percent. Last week, the flash PMIs evidenced a slight decline from August, but remained at a healthy pace. New home sales also rose more than expected in August, as did housing starts and building permits. Leading indicators were also strong. And retail sales in August were also notably strong.

This week’s economic calendar includes several important reports, including the PCE deflator for August, expected to show an unchanged headline rate, but some modest improvement in the core rate. The ISM reports for September are expected to show the same modest decline reflected in the flash PMIs. Durable goods orders for August, to be reported on Monday, are expected to be strong as well. While the headlines from Washington have the potential to create a lot of noise this week, and raise the level of investor anxiety, the economy remains fundamentally sound.

Important Disclosures:

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.

Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources.  This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.

Investing involves risk including the risk of loss of principal.

A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.

The GDPNow forecasting model provides a "nowcast" of the official GDP estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis. GDPNow is not an official forecast of the Atlanta Fed. It is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model.

The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. The PMI is based on five major survey areas: new orders, inventory levels, production, supplier deliveries, and employment. it is a leading indicator of economic conditions. 

The flash services PMI is based on approximately 85 to 90 percent of total PMI responses each month. It is designed to provide an accurate advance indication of the final PMI data. As flash services PMIs are among the first economic indicators for each month, providing evidence of changing economic conditions ahead of comparable government statistics, they can have a significant effect on currency markets.

The ISM manufacturing index, also known as the purchasing managers' index (PMI) is an estimate of manufacturing for a country, based on about 85% to 90% of total Purchasing Managers' Index (PMI) survey responses each month. It is considered to be a key indicator of the state of the U.S. economy.

The personal consumption expenditure (PCE) measures of the prices that people living in the United States pay for goods and services. The PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

Past performance is not a guarantee of future results.

An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

Definitions of individual indices mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor.

Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

Ameriprise Financial Services, LLC. Member FINRA and SIPC.