Key Drivers for the Week of July 5th, 2021
TIP – This is a 1-minute brief bullet-point summary. It is a tool that gives investors and financial a fast and simple list of what to watch for and talking points for the week.
- Q3 global growth continues apace on strength in U.S., UK, Europe, China
- U.S. markets closed Monday in observance of July 4 Independence Day
- U.S. calendar light with June ISM services, May JOLTS; FOMC minutes
- Canada releases BoC’s Q2 Business Outlook Survey; employment report due
- RBA on hold, may tweak QE posture; Malaysia’s Bank Negara seen steady
- China services PMI, CPI, PPI awaited; Japan services PMI, consumption due
- European Commission forecasts likely upgrade growth, inflation projections
- Final Eurozone PMIs, retail sales; German ZEW, mfg orders, production
- UK slate has final services and composite PMIs, production, trade data
- Core central banks talking about QE, but rate hikes a long way away
- U.S. focus: jobs, ISM, PMIs, vehicle sales, housing, confidence data due
The major currencies are plying narrow ranges in early week trading. The dollar is roughly 0.5% on levels seen this time last week despite shifting lower on Friday following the ‘goldilocks’ U.S. June jobs report, which was neither too cold so as to signal declining economic momentum, nor too warm so as to shift the needle on Fed policy tapering expectations.
Specifically, the June jobs report revealed an upside surprise for payrolls, but it came alongside a big workweek drop and a shift in jobs toward low-paid workers, leaving a lower trajectory for hours-worked, and hence a weaker June path for economic activity than assumed.
The wage data were a tad stronger than assumed in June but were revised down in May, leaving only a slightly stronger than assumed path. The household data undershot assumptions. Overall, the report reveals downside risk for near-term outlook, despite firm payroll data.
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Payrolls in the U.S. remain some 6.8 mln below pre-pandemic levels, and the labor market still remains some way from what the Fed would deem to be making “substantial progress” in order for it to justify policy tightening.
However, the market continues to become more Bullish – and it dangerous.
A recent survey by Natixis Investment Managers of 750 individual investors expects to earn 17.3% after inflation. This is largely due to the S&P 500 returning 18.4% last year and the 15.9% return this year. It is two times the 7.1% average stock market return since 1926 and we are looking at rising inflation similar to the 1970s.
For those that don’t remember, the worst stock performance of the 1970s came when inflation increased rapidly and double to about 6% from 1972 to 1973. The market dropped 40%! However, it came back by 1980 leaving investors flat for most of the decade.
This type of expectation could lead to a massive sell-off and market drop.
We are caught between a rock and hard place. On one hand, we have a bull market with overpriced stocks. On the other hand, we have rising inflation that is eating away the purchasing power of cash.
I think advisors and investors need to weigh their portfolios more toward consumer defensive stocks and commodities. Caution must be taken on some commodities such as lumber as the prices have been falling. My latest idea is auto parts stocks because people are holding onto cars for much longer.
Many have recommended gold and for good reason. In 1971 gold traded at $35 an ounce, but was up to $850 by 1980. This is a 2300% gain! It is likely to go up, but not as much in the 1970s. So I wouldn’t put overly weight on this allocation.
Global growth should be on track for a solid pace over the second half of the year amid a widening distribution of vaccines, reopenings of economies, and ongoing stimulus measures, even if the Delta variant, bottlenecks, labor market shortages, and supply chain disruptions create headwinds.
Pent-up demand should remain a major factor underpinning the overall recovery, supporting a pick up in services, alongside a healthy pace of production to meet the demand.
The rebound in Europe, helped by easing in travel restrictions, along with the U.S. recovery, should help set the pace, taking over from China where activity has been losing steam.
The markets will reopen after the July 4 holiday weekend. Wall Street is coming off of record highs as inflation warnings get louder and tapering expectations linger amid strong data releases signaling that virus jitter may slow, but not derail the global recovery.
The not too hot, not too cold U.S. jobs report will keep the FOMC on hold, with the ECB accommodative as well, but keeping a watchful eye on inflation. The RBA will be closely followed this week as it might tweak its QE purchases.
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