August 13, 2021

Weekly Market Commentary August 9th to August 13th 2021

It was a somewhat quiet but telling week regarding economic releases. Mixed inflation numbers are starting to tell two stories, the employment situation hit a new milestone, and the consumer started to show some concerns.

Let’s start with inflation. We had July prints for both the Consumer Price Index (CPI) and the Producer Price Index (PPI). On the CPI side, the July number came in right at the estimate of 0.5%, down from the previous month’s 0.9%. Could this be the first sign that inflation is transitory, as the Fed has been suggesting all along? Let’s see a bonified downward trend before we declare that inflation worries have been overstated. When food and energy are removed (termed the “Core CPI”), the numbers are even lower with the actual coming in at 0.3% compared to the 0.4% forecast. But hold that thought. The opposite happened on the producer side, as prices came in much higher than expected. The monthly PPI for July came in at a whopping 1.0% (matching June’s) compared to a 0.6% consensus. As mentioned in this report many times, there have been supply chain bottlenecks and labor scarcity since the reopening of the economy; and for the time being, producers are bearing the brunt of it. As with the positive CPI report, let’s see if a trend develops before we make any more assumptions. Suffice to say, inflation remains a concern as the country gets back on its feet.

On the employment side, the milestone that was hit came in the form of the JOLTS job openings. There are now more than ten million jobs available in our economy – the first time this number has ever hit the eight-digit mark. But there are two sides to this story. Having ten million jobs available has to be a good thing as it would seem that anyone who wanted a job could get one, right? But what types of jobs are these and what is the pay scale relative to unemployment benefits? As government pandemic subsidies will be ending over the next few weeks it will be telling if we see the job openings and jobless claims drop. Initial claims for the week matched consensus and came in at 375,000 which almost matched the June low (368k) since the start of the pandemic. It is very difficult to solely use the employment situation right now as a good measure of the country’s economic health. Yes, we have vastly improved since last year, but the statistics are not always telling the whole story.

Finally, the University of Michigan Consumer Sentiment Index, a general measure of consumer optimism, surprised to the downside and came in at 70.2 for August when consensus called for 81.2. This was the lowest level since 2011 and could be a sign that the consumer has started to feel the heat of the recent inflationary pressures and/or the resurgence of the COVID variants. As we know, the consumer is the largest piece of the GDP puzzle so any strain on consumer confidence may ultimately detract from third or fourth quarter GDP numbers later this year.

In markets, equities finished the week mixed with the S&P 500 (+0.7%) and the Dow Jones Industrials (+0.9%) finishing the week at all-time highs, while the tech-heavy NASDAQ finished down slightly (-0.1%). Interest rates were virtually unchanged across the curve for the week as the 2-year US Treasury finished the week at 0.21%; the 10-year at 1.29%; and the 30-year at 1.94%.

Next week we will see July Retail Sales, Industrial Production and Capacity Utilization, Building Permits and Housing Starts, and regional manufacturing results.