Week in Review: July 19, 2021
July 19, 2021
Recap & Commentary
Equity markets ended the week lower on concerns about the potential impact of the rapidly spreading Delta coronavirus variant, higher inflation, and the growing realization that economic growth is likely near, or already at peak levels and set to decelerate over the remainder of the year. That doesn’t mean the economy is headed for recession. Most likely, growth will revert towards its pre-pandemic pace over the remainder of 2021 and into 2022.
Whatever concerns equity investors may currently have about higher inflation, bond markets appear to be rather sanguine, as evidenced by the 10-year Treasury yield closing the week at 1.31%. That would suggest that bond markets are generally aligned with the Fed’s outlook and ours, that the current spike in prices will prove to be transitory, and economic growth will moderate moving forward.
Speaking before Congress, Federal Reserve Chairman Powell largely reiterated his previous positions on inflation and monetary policy. During two days of testimony, Powell acknowledged that there is “a shock going through the system associated with reopening of the economy, and it has driven inflation well above 2%.” Powell noted, however, that the Fed is watching inflation closely and would “absolutely change our policy,” if rising costs were to deviate from expectations.
Second quarter earnings season is underway, with nearly 10% of S&P 500 companies having reported. Thus far, 85% of reporting companies have exceeded expectations. Aided by a 30% decline in 2Q20 earnings, 2Q21 earnings are expected to increase 69% according to industry group Factset.
Economic Bullet Points
Consumer inflation (CPI) remained strong in June increasing 5.4% year-over-year at the headline level, faster than expected, and the highest level since 2008. Excluding more volatile food and energy prices, core CPI rose 4.5% from the prior year, the fastest pace since 1991. As has been the case for the past several months, used car and truck prices were again a driving force behind the overall increase. Up 45% from a year ago they accounted for one third of the overall increase.
Similar to consumer inflation, producer (business) inflation (PPI) rose sharply again in June, experiencing its highest level in over 10 years. On a headline basis, PPI jumped 7.3% from the prior year, while core PPI rose 5.6%. Higher input costs for raw materials and labor helped drive the increase.
June retail sales rose 0.6%, defying expectations for a 0.4% decline. Compared to a year ago, sales increased 18% and are now back above their pre-pandemic level. Consumer spending is benefitting from households accumulating an estimated $2.5T in excess savings during the pandemic.
Consumer sentiment unexpectedly declined in the first half of July, falling to its lowest level in five months and pressured by concerns about rising inflation. According to the survey’s director, consumer complaints about rising prices on homes, vehicles, and household durables reached an all-time record.
The Delta variant’s rapid spread is resulting in an uptick of new cases, particularly in countries and communities that remain under vaccinated. Nationally, US daily new cases rose to 79K, the highest level since April.
|U.S. Bond Market||0.2%|
|10-Year Treas. Yield||1.31%|
|WTI Oil ($/bl)||$71|
The Week Ahead
- Housing Starts
- Existing Home Sales
- Weekly Jobless claims