July 16, 2021

Weekly Market Commentary July 12th to July 16th 2021

The continuance of strong inflation numbers was the story of the week as both consumer and producer prices once again came in much higher than expected. The same argument we have been discussing for the past few months is still in play here – is it temporary or is it permanent? Has the government stimulus along with disjointed manufacturing pipelines set the stage for long-term price increases? Or is it as the Fed describes as “transitory”? We are in the camp with the folks who say prices will eventually moderate but as each month of higher prices goes by, it gets slightly harder to hold firm to that theory. Look for more clues from the Fed as they start to consider tapering their bond-buying; a sure sign that they may be reconsidering the transitory nature of the current inflation environment.

The actual inflation numbers released this week showed up both on the producer side, as the month-over-month PPI came in at +1.0%; and on the consumer side where the month-over-month CPI hit +0.9% when consensus for both was +0.5%. On the consumer side, industries deeply affected by the pandemic came in the strongest with airline fares, vehicle sales, and apparel all leading the final print higher. On the producer side, supply chain bottlenecks are the leading culprits in the strong print as manufacturers struggle to keep up with demand. We continue to believe these will eventually “work themselves out” and bring the supply chain back to pre-pandemic levels of efficiency. When that happens remains slightly cloudy, however.

The other surprise of the week came on Friday when June Retail Sales demolished consensus (-0.4%) to come in at an eye-popping +0.6%. The consumer is not slowing down despite rising prices for certain goods and waning government stimulus.

Elsewhere in the economy, the Weekly Initial Jobless Claims continue to fall, despite being on a less-than-desirable pace for the Fed. 360k new claims came in for the week which, at under 400k for the fourth week in a row, can now be considered a downward trend. Industrial Production, while still positive, came in slightly under expectations; and Capacity Utilization was pretty much right on target at 75.4%.

Equities were down across the board as the S&P 500 and Dow Jones Industrials finished the week less than 1% in the red, while the tech-heavy NASDAQ lost 1.9%. The S&P 500 closed at 4,327, the Dow ended at 34,688, and the NASDAQ disappointed at 14,427. Despite the optimism in the economy, investors are clearly rattled by the continued inflationary pressures.

In fixed income, the yield curve flattened slightly as the yield on the 2-Year U.S. Treasury was up 6% while the 10-Year and 30-Year fell 4.1% and 2.6% respectively. The bellwether 10-Year closed the week at 1.30%.

Next week’s notable economic data releases include Housing Starts, Building Permits, Existing Home Sales, Weekly Jobless Claims, and the Markit manufacturing and services indices.