Weekly Commentary: August 2, 2021
The Week in Review: July 25 - 31
Fed says it’s ready to get ready
The Federal Reserve met last week and subtly changed its guidance to open the door to removing some of the massive liquidity it has been providing. However, the Fed continued to stick to its view that inflation is a transitory phenomenon and will ease. Markets shrugged off a softer-than-expected Q2 GDP number on Thursday (more on this below), giving the Fed more cover along with some fresh inflation numbers to delay tightening. Inflation is still rising but was mostly in line with (if not slightly below) estimates. Consumer spending remains strong, which also bolsters the stock market.
We are at a crossroads: Are the Delta variant of the coronavirus and the restrictions that possibly come with it plus rising inflation going to hamper growth going forward? Or are consumers going to keep spending once the payments from Washington die out? The stock market seems to think that the Fed won’t move anytime soon and the bond market, as measured by the 10-year Treasury yield, continues to dismiss inflation as it hovers around 1.35%.
It all doesn’t seem to matter to markets right now — until all of a sudden, it will. Almost anything can set off a stampede, from a soft jobs report next week to increased concerns over the Delta variant’s impact on economic growth. For now, though, it looks like smooth sailing for markets.
Oops, they did it again — GDP growth misses estimates
There’s really no connection between Britney Spears and the expectations for 9% Q2 2021 GDP growth
— I just wanted the headline to work. For the second time in as many quarters, the GDP prognosticators and economists missed the mark. After trillions in government stimulus alongside low rates and unprecedented bond purchases from the Fed, we managed to grow 6.5% in the second quarter, short of the consensus +8-9%.
Both are pretty significant misses, and we’re left to wonder why the actual number has been so far off expectations. It raises many questions: Is the economy as open as it will get? Do we really need the additional dollars being poured into the economy? Are we headed toward more restrictions due to the Delta variant, and will they impact growth? Is inflation a bigger problem than officials are letting on?
All of these are good questions currently lacking real answers, other than we need to wait and see.
I’ve been saying for several months that Q2 would be the high-water mark for the year as far as economic growth is concerned. I’ve also noted that the second half of 2021 would be significantly slower as the Biden administration’s policies take hold. The data isn’t all bad; we did regain all the GDP losses from 2020 and are now officially higher than ever, but oh, what could have been.
This is all reminiscent of 2009-2011, when the Obama administration focused on passing the Affordable Care Act (Obamacare) while (in my opinion) it should have been squarely focused on getting the economy healthy. That period was dubbed the “jobless recovery” and ushered in constant Fed intervention and rate manipulation. Fast forward to today: We are all over the place, from hard and human infrastructure to voting rights and social justice to mask mandates and a spike in violence in our cities. Once again, in my view, the focus should have been on reopening as quickly as possible, getting back to work and returning to normal. I’ve always said that “chewing gum and walking” was not compatible with the government. Instead, we should focus on one thing — and get it done. A growth rate of 6.5% is really good, but it should be a lot higher and I believe we’ve missed a great opportunity.
Infrastructure gets done
It looks like we have theframework for an infrastructure deal. The details are still sketchy, but it seems the $1.2 trillion agreement will focus on “hard” infrastructure: roads, bridges, seaports, airports and bringing high-speed internet to more people. Why it was so difficult to get to this point is not a mystery, but the fact that the deal has some bipartisan support is good. Most people will agree that our roads and bridges need attention and bringing internet access to more people is good for the economy.
The devil will be in the details. Much of the bill hasn’t been written, but there is broad agreement on the major points and the contentious “human infrastructure” provisions have been removed. Those components haven’t gone away but have simply jumped into the next fiscal knife fight, the $3.5 trillion spending plan. Democrats will probably try to pass the spending plan via reconciliation, which would not require the dismantling of the filibuster in the Senate. If those items are included in a budget bill, they may have a very short shelf life. If there is turnover in Washington in the next election cycle, those same provisions would be subject to the budget process and may not be funded if a different party is in power. For now, a bipartisan solution to much-needed national infrastructure is a good thing.
Coming this week
This week will be relatively quiet after last week’s torrent of data.
The big announcement will be Friday, when we expect the Bureau of Labor Statistics employment situation summary. Expectations are for +600,000 jobs to be created.
Factory Orders and Motor Vehicle Sales on Tuesday will give a glimpse into inflation and demand for cars by the consumer.
Wednesday will showcase the ADP private sector jobs report. Mortgage Application data will also be released that day; inventory has been going up and demand is slowing for homes. It will be worth watching to see if this is a longer-term trend.
Remember, we’re still in earnings season, so we might get a surprise here or there.
Finally, on Friday, we’ll see if Wholesale Inventories are increasing, which would be anti- inflationary. If they’re decreasing, we should expect inflationary pressures to persist.
Have a fantastic day!
Tom Siomades, CFA®
Chief Investment Officer
AE Wealth Management
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