Overview: Stock markets were generally higher last week as strong earnings and favorable economic data overcame COVID-19 Delta variant concerns. A rise in COVID-19 cases has increased potential for continued fiscal and monetary policy support, helping to support near record levels for the S&P 500 index, which was up 0.8% for the week. Value stocks, which are more sensitive to the economic recovery, have outperformed growth stocks by about 2.6% for the year-to-date, as the rally continues in the markets. In bonds, interest rates continue to trade in a narrow range, with the 10-year Treasury ending the week at a yield of 1.30%. Economic data was highlighted by consumer prices (CPI), which rose by 0.3% for the month of July (4.3% annualized). This was below expectations and may give investors hope that inflation has peaked. However, producer prices (PPI) saw the largest increase in more than a decade, adding to the debate over whether inflation will be transitory. This week we will get important data of retail sales and industrial production tomorrow, followed by housing data on Wednesday. Minutes from the latest Federal Reserve meeting will be released on Wednesday as well. With the next scheduled Fed meeting not until Sept. 21-22, investors will be focused on the Jackson Hole, Wyoming meeting next week, where the headline topic will be “Macroeconomic Policy in an Uneven Economy”.
Virus update: (from JP Morgan) Despite the surging Delta variant, the economy continues to see a powerful recovery. The July employment report showed robust progress toward full employment, with 943,000 payroll jobs added and the unemployment rate falling to 5.4%. While nearly 9 million Americans remain unemployed, last week’s JOLTS report showed the number of job openings has now eclipsed the number of unemployed Americans by a remarkable 1.3 million. The last time this occurred, in early 2020, unemployment was at a 50-year low. Businesses are grappling with severe worker shortages, a reality that is corroborated by the National Federation of Independent Business (NFIB) July survey, which showed a record 49% of small business owners reporting job openings that they could not fill. Wages have risen in response to this labor market tightness, but neither businesses nor workers have had the time to adapt to the post-pandemic economy as they had in the prior expansion. More generous unemployment benefits, continued virus fears, new childcare responsibilities and reduced immigration have all restrained labor supply, while many job openings are not a good match for the skills of unemployed workers. It’s possible these structural mismatches in the labor market mean the economy will reach “full employment” at a higher unemployment rate than prior expansions would suggest. As Fed officials gather for their annual Wyoming retreat, they should consider the possibility the economy may overheat at a lower boiling point this expansion, increasing the need to taper extremely easy monetary policy.
Weekly Returns and Data
Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s, Econoday
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