Commentary Directory

The Week Behind

It's been some time since we saw some choppiness in markets, and we finally got some this week. The S&P 500 fell -0.59% and the Nasdaq fell -0.73% after a solid Friday offset some losses early on in the week. Asian stocks performed worse with China's regulatory crackdown lingering. In the week, the Shanghai Composite fell -2.5% and the closely related Hang Seng index (in Hong Kong) fell -5.8%. Risks are making themselves known especially as US equities sit near all-time highs and the VIX ready to jump from its coiled position. The volatility also expressed itself in a major move lower in the price of oil. WTI futures started the week above $68 and fell towards $62 a barrel, reportedly, on worries that growth would slow due to Delta and tapering. Combine the downward move in oil markets with other commodities staggering lower (Bloomberg Commodity Index down -3.7% last week) and you've got a nod to the "transitory" inflation narrative.

Updates on business activity in the US came through retail sales and industrial production early on in the week. Retail sales stumbled to a -1.1% decline in July after a small gain of 0.7% in June. Motor vehicles & parts sales was the major factor in the decline (total retail sales ex-motor vehicles at -0.4%) with a -3.9% drop. The other sectors saw mixed movements but most were still 10-15% above a year ago. Food service & drinking places sales continued on its reopening path, up 1.7% in July and up 14.7% in the May-July 2021 period over the February-April 2021 period. The days of surging retail sales are over, and the summer spending bump was slightly disappointing. May-July 2021 retail sales were just 2.8% higher than the February-April 2021 period. There has been discussion of slower goods spending shifting to stronger service spending as the recovery continues in the latter half of 2021, and the sour July report provides evidence of this shift. The latest Quarterly Services Report has also been supportive of that narrative with service revenue growth up 4.0% in Q2 2021, up from 2.5% Q1 2021. Ceteris paribus, the trend will likely continue with goods sales returning back to a pre-pandemic path, and service spending strong in Q3. However, Delta virus risks remain.

While the demand front faltered in July, the supply side stepped forward with a solid industrial production number, up 0.9% month over month. The solid gain was mostly broad-based with end product growth up 1.6% (consumer goods up 1.0% and business equipment up 2.8%). Construction supplies bounced 0.9% after three straight declines. The short-term cooling of the real estate market likely led to these later spring early summer drops, but consistently high homebuying demand and the end of inflated lumber prices will keep construction production near and above peaks. Most importantly, we saw a large monthly spike in motor vehicle and part production, up 11.2% in July, that will help assuage fears of persistently high prices in the auto market. Primary metals and machinery production gains of 1.2% and 1.0% will also play into a "transitory" inflation narrative. Overall, observers can take the strides suppliers are making as a sign that constraints from low input inventories, high costs, and labor shortages began to peak in July. Total industry capacity utilization sits at 76.1%, well off the lows of 71.5% from a year ago, but still below the long-term average around 80%. The next round of stimulus through infrastructure spending is sure to heat industrial production even more, but could it prove to be too much? That remains to be seen and could depend on how much accommodation the Fed decides to keep in its monetary policy.

Chart of the Week

Where's the inflation? The US leads the developed world in all CPI categories. Canada and Australia are close behind while the EU and the UK are seeing moderate price pressures. Japan's deflationary struggles continue as COVID makes a reappearance.

The Week Ahead

Several more indicators of supplier activity in the US will be revealed as manufacturing orders data for July comes out. Personal income and consumption comes out after that. These reports follow the flurry of Flash PMI reports from IHS Markit that will give a glimpse of August business conditions. From Jackson Hole, the Fed will be watching these reports and hoping they will show some easing in the supply constraints. The solid industrial production from last week should give us hope that these economic releases will tell a similar story.