Report (Premium Edition) 07-26-2021

Key Market Trends

Tip: Use this as a quick guide on the short-term direction (1-2 weeks) of key markets. It is not a signal to buy or sell, just to show the trend. This is a quick cheat sheet to know the trend and help understand what is happening with the markets in the short term. I started making this section years ago because once had a client that would call me nearly every day asking the direction of the markets.

S&P 500 Sector Trends

Tip: Use this section to know the performance of various sectors, weight portfolios, or look for trades. Modern portfolio theory stresses the importance of diversification, but recently several sectors like technology have outperformed others like utilities. This is also a way to narrow the sectors to find investment opportunities.

REIT Alert: Due to Covid-19, there is a large percentage of people that have not paid rent or mortgages. We are very worried about the effect it could have on real estate investment trusts’ (REITS) value. Even though the sectors may trending bullish, we believe that REITs could have a significant drop in value.

Key Drivers for the Week of July 26, 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.

• Global growth remains solid into 2H, but likely dented by Delta variation
• Stocks and bonds rally on dovish ECB and easing in Fed QE tapering worries
• The congressional budget battle over raising the debt limit and Infrastructure Bill
• FOMC expected to say “substantial further progress” yet to be made
• Heavy earnings calendar: Tesla, Apple, Microsoft, Facebook, Pfizer, Amazon
• U.S. data: Q2 GDP, new home sales, durables, confidence, income, ECI
• Japan docket has PPI, retail sales, unemployment, production, confidence
• Eurozone GDP, PMI, ESI confidence, unemployment, and HICP due
• German Ifo business sentiment, unemployment, HICP, import prices
• UK monitors Brexit agreement on Northern Ireland protocol

Stocks & ETF Watch List

Tip: Use this section to find stocks and ETFs to add value to your portfolio by increasing the alpha (return) and decreasing beta (beta). Our list is updated monthly to help provide our readers with timely insights. Readers should do their own research before making any investment. In order to make our report easier to read, we are now including the stocks as lists for readers in separate posts.

• Inflation Stock Picks: List of stocks that we think should perform better in a rising inflation environment. Click here
• Auto Parts Stock Picks: Auto parts companies are likely to see their stocks rise as the average age of cars and light trucks increased from 11.9 years in January 2017 to 12.2 years in January 2021, according to new data from IHS Markit. Below are the top auto parts companies that investors should buy now before the profits roll in. Click here.
• Solid Picks: This group of stock/ETF picks is likely to experience growth and perform well into the near future. Click here.
• Dividend Stocks: List of stocks that have excellent dividends and business performance. Click here.
• Dividend Growth Stocks: List of stocks that have a history of growing dividends. Click here.
• Dividend ETFs Picks: This list of ETFs is selected for their ability to pay dividends. Click here.
• Dogs of the Dow: This list of DOW stocks based on H. G. Schneider’s Article in the Journal of Finance in 1951 that used the price-earnings ratio. The general idea is that blue-chip companies that pay a dividend are more likely to withstand an economic downturn. Click here.

Week Ahead: Delta Dents Global Growth

On July 26, 2021

Optimism over global growth continues to dominate forecasts and a strong 2H is generally expected. While the accelerating spread in the Delta covid variant has caused considerable consternation and renewed downside risks, we suspect the virus will only dent growth.

Indeed, the increased vaccination rates, especially in the West, along with 1H momentum amid more fully opened economies and the pull from pent-up demand should help mitigate considerably the bearish impacts. Additionally, supply constraints are also easing in many areas. And most importantly, central bank accommodation will remain in place.

Though there has been increased worry over QE tapering, the risks from Delta are likely to delay any such moves from the FOMC or ECB. In fact, as seen in last week’s ECB stance, the bar for a tightening in policy has been raised.

The S&P 500 continues to rocket to new levels and hasn’t touched the 200MA since last June and we think it could correct at any moment. One of those triggers could be a government shutdown.

The current $28.5 trillion debt is the starting point as the two-year suspension of the debt ceiling occurred in 2019 but will expire at the end of July. Treasury Secretary Janet Yellen believes the federal government will hit its spending limit very quickly and said default is “unthinkable”.

Senate Minority Leader Mitch McConnel (R-KY) said Republicans will not support an increase to the U.S. debt limit. The Senator said, “I can’t imagine a single Republican in this environment that we’re in now — this free-for-all for taxes and spending — to vote to raise the debt limit.” 

This makes me think there is a 50/50 chance of shutdown because Republicans appear to be unified against raising the debt limit. Inflation will be the reason why Republicans won’t immediately support increasing the limit….. but will most likely increase it on their terms. The limit could be increased through reconciliation, but the government will likely run out of money before it gets done. Hence why I think there is a good chance of a government shutdown.

The markets were modestly firmer heading into today. Wall Street benefited from the rally in European bourses after the dovish ECB’s stance. That added to renewed beliefs that the ECB and the FOMC will not decide to start tapering any time soon. The unexpected jump in jobless claims caused some jitters too but added to the dovish outlook on monetary policy. The NASDAQ was up 0.36%, with the S&P 500 0.2% higher yesterday. Treasuries were a little richer as well, on the same factors. Longer-dated rates were 2 bps lower at 1.278% on the 10-year and 1.914% on the 30-year. The 2-year was marginally lower at 0.200%.

We expect the markets to meander into the weekend, assessing recent positioning, along with monetary policy factors with the upcoming FOMC (Wednesday) following the ECB’s meeting, as well as uncertainties over the Delta variant and global growth. Today’s calendar is light, with just the flash July Markit manufacturing, services, and composite PMIs. The earnings slate slows to end the week but features Honeywell, NextEra Energy, American Express, Equinor, Roper Technologies, Kimberly-Clark, Schlumberger, Regions Financial.

NORTH AMERICA

Wall Street rallied to end last week with the major indexes all setting new highs. The Dow closed above the 35,000 mark for the first time, with the S&P 500 up over 4400, while the NASDAQ topped 14,800. Good earnings reports, solid data, and easing in worries over the start of QE tapering from the Fed all supported strong demand for equities which more than offset the rout from Monday. Concurrently, the expectations for a still dovish stance from the FOMC alongside the shift from the ECB supported bonds.

The 10-year rate finished at 1.276%, and the 30-eyar was at 1.915%, just shy of the lows since early February. The wi 2-year rate was at 0.220%. We expect these market elements will remain in place near term assuming no hawkish surprises from the FOMC. There is a relatively heavy data calendar to end July, but none of the reports should alter the positive outlooks. Supply will be of interest with $183 bln in 2-, 5-, and 7-year auctions. While they shouldn’t be too problematic ahead of month-end, there is event risk from the Fed that could leave some potential buyers sidelined.

The FOMC meeting (Tuesday, Wednesday) highlights. However, more likely than not it will be a nonevent, especially as it will not include quarterly forecasts. The surge in inflation pressures in recent months had increased market expectations that policymakers might say they are closer to announcing a timeline for QE, but we don’t anticipate that yet. Chair Powell did confirm in the June presser that the Committee actually started talking about tapering in April, and he should indicate discussions have continued given the strengthening economy and the rise in inflation.

But we expect him to reiterate that the “substantial further progress” criteria has yet to met. Powell did acknowledge last month that inflation has come in stronger than forecast. He also was reticent to characterize inflation as transitory and added that the Fed would be prepared to act if price pressures or longer-term inflation expectations were seen to be moving “materially and persistently” above goal. And while those factors suggested a slight hawkish leaning, the downside risks to the recovery from the spreading Delta variant and the various bottlenecks will leave the Committee cautiously sidelined, with no hints that a decision on the timing QE is imminent, and hence not likely at the August Jackson Hole central banker meetings.

This week’s data slate has several releases that will garner a lot of attention. Though it is backward-looking, Q2 GDP will be of interest. Also on tap are more housing numbers, consumer confidence, income, consumption, and ECI. We forecast a 7.3% growth pace for Q2 GDP (Thursday), picking up from the 6.4% Q1 pace, supported by the widening distributions of of vaccines that allowed reopenings, while two rounds of stimulus supported pent up demand. We do see the Q2 growth clip as the likely “speed limit” due to capacity constraints amid widespread shortages, plunging inventories, and soaring prices through the middle of the quarter.

June new home sales (Monday) are expected to bounce 6.6% to a 820k pace, following the -5.9% May drop to 769k. We’ve seen a 12-month stretch of sales through May that are at the highest rates since a 778k reading in July of 2007. Reflecting the ongoing strong demand, we expect the median sales price to rise to a new all-time high of $378,000 from the current record of $374,400 in May, leaving a y/y increase of 10.8%. Durable goods new orders (Tuesday) are expected to increase 2.3% in June, helped by a 6.0% rise in transportation orders. Boeing orders surged to a 3-year high of 219 planes in June, though the vehicle assembly rate slowed to 8.9 mln from 9.7 mln in May amid chip shortages. July consumer confidence (Tuesday) should dip back to 121.0 after jumping to a 16-month high of 127.3 in June. We expect the 1-year inflation measure to remain at the 13-year high of 6.7% seen in June. The final July consumer sentiment index likely held close to 80.8 in the preliminary July reading, down from the 85.5 in June.

Personal income (Friday) is seen sliding -0.8% in June following the -2.0% May drop amid declines in the impacts from stimulus checks. We expect a 0.9% rise in consumption after a flat May figure, with a savings rate drop to 10.8% in June from 12.4% in May and a 27.6% peak in March. And the Q2 employment cost index (ECI) is estimated to rise 0.9% Q/Q, after the 0.9% gain in Q1. We expect a 0.9% increase for wages and salaries and a 0.7% rise for benefit costs. As-expected gains would leave a 3.0% y/y increase that beats the last expansions’ 2.9% cycle-high in Q4 of 2018. Overall, compensation growth has remained solid through the 2020 pandemic and into 2021, following a modest cyclical uptrend into the start of the pandemic, likely due to shortages for many categories of labor despite pockets of labor.

Supply heats up again this week but it is a shorter-dated paper that is on offer. The Treasury is selling $183 bln in notes, including $60 bln in 2-year notes (Monday), $61 bln in 5-year notes (Tuesday), and $62 bln in 7-year notes (Thursday). Yields richened fractionally into the close on Friday, even as Wall Street rallied to record peaks. The wi 2-year was at 0.220%, with the wi 5-year at 0.730%, and the wi 7-year at 1.050%. Aside from the 0.249% stop at the June auction, this would be the highest rate since March 2020. For the 5-year, this would be the lowest stop since February. And for the 7-year, this would be the cheapest level since January.

The earnings slate is very heavy with many headliners. Most of the reports to date have been beaten, though guidance has been iffy. Tesla, headlines (Monday) along with Lockheed Martin, Cadence Design, Otis, Ameriprise, Logitech, Check Point Software, Brown & Brown, Universal Health, Hasbro, and Lennox. Tuesday’s docket has Apple, Microsoft, Alphabet, Visa, UPS, Starbucks, Raytheon, 3M, GE, Advanced Micro, Stryker, Mondelez, Chubb, Sherwin-Williams, Fiserv, Boston Scientific, Ecolab, Waste Management, MSCI, Centene, Corning, Rockwell Automation, Stanley Black & Decker, ADM, Sirius XM, Teladoc, DTE Energy, Teradyne, IDEX, Principal Financial, Pulte, Invesco, and Pentair. Then comes Facebook on Wednesday, along with, PayPal, Pfizer, Thermo Fisher, Shopify, McDonald’s, QUALCOMM, Bristol-Myers Squibb, Boeing, ServiceNow, GlaxoSmithKline, Lam Research, ADP, CME, Moody’s, Norfolk Southern, Humana, Ford, Canadian Pacific Railway, Spotify, O’Reilly Automotive, Aflac, Cognizant, Xilinx, Suncor Energy, Garmin, Generac, Yum China, Hess, Hartford, CGI, Ingersoll Rand, Raymond James Financial, PerkinElmer, Arch Capital, Altice, BioMarin, and Fortune Brands. Thursday brings Amazon, Mastercard, Comcast, Merck, T-Mobile, AstraZeneca, Shell, Anheuser-Busch Inbev, Sanofi, American Tower, S&P Global, Altria, Gilead, Twilio, ICE, Northrup Grumman, Ambev, Keurig Dr Pepper, Pinterest, Lloyds Banking, Carrier, Baxter International, Hershey, Welltower, Republic Services, Hilton, Yum!, Nokia, Arcelor Mittal, Skyworks, Valero, Credit Suisse, Expedia, Martin Marietta, Fortis, PG&E, Carlyle Group, Textron, Liberty Global, Citrix, Molson Coors, and Mohawk. The week ends with P&G, Exxon Mobil, AbbVie, Chevron, Charter Communications, Caterpillar, Enbridge, Illinois Tool, Colgate-Palmolive, IDEXX Labs, Takeda Pharm, Aon, Johnson Controls, Liberty Broadband, Nat West, TELUS, Weyerhaeuser, W.W. Grainger, Cerner, Imperial Oil, Restaurant Brands, Tata, Booz Allen Hamilton, Cboe, and Newell Brands.

Canada’s release schedule shifts into a higher gear this week, with key reports on CPI and GDP on tap. The CPI (Wednesday) is expected to climb another 0.5% (m/m, nsa) in June after the matching 0.5% jump in May. The annual growth rate is projected to slow to a still elevated 3.3% (nsa) from the 3.6% y/y clip in May. An easier comparison is behind the expected slowing in annual CPI growth, as CPI saw a marked jump in June of last year. Meanwhile, May GDP (Friday) will reflect the impact of additional restrictions on the economy that were implemented as virus cases surged — GDP is seen falling -0.3% in May after the -0.3% drop in April. However, the relaxation of third-wave restrictions as vaccinations made solid headway should lift GDP in June, with further acceleration in growth seen during July. The planned reopening of the Canada/U.S. border in August is also supportive of the recovery outlook. The industrial product price index is also due Friday.

It is another empty slate for the Bank of Canada this week. At the announcement this month, the bank reduced QE to C$2.0 bln per week from the previous C$3.0 bln, matching widespread expectations. The policy rate was held steady at 0.25%, also as expected. Forward guidance remained in place and identical to the June 9 announcement, with the Bank committed to holding the current rate-setting until sometime in the second half of 2022. In line with central bankers around the globe, officials view the spike in inflation as “transitory,” with total CPI seen above 3% through 2H of this year, easing towards 2% in 2022. But while the factors lifting CPI are “transitory…their persistence and magnitude are uncertain and will be monitored closely.” We continue to expect a further reduction in QE to C$1.0 bln by the end of this year, perhaps as soon as the September announcement

ASIA

Markets will continue to keep an eye on Covid in Asia, where relatively low vaccination rates have been wreaking havoc on some regional economies. Indonesia, Malaysia, Thailand, and the Philippines have been particularly hard hit, while Japan, which is attempting to hold the Olympics this week and next continues to struggle with rising cases. This will all take a toll on the economic outlooks for most of the region though the strength in the West will help offset. This week’s calendar features Japan’s month-end data offerings, including industrial production, retail sales, unemployment, and consumer confidence. China releases the July official CFLP manufacturing PMI, while GDP data is due from South Korea, Taiwan, and Hong Kong. Elsewhere, prices, trade, and production figures are on tap. There are no central bank meetings scheduled this week.

Japan’s docket kicks off (Tuesday) with June PPI, which is expected to warm to 1.7% y/y from 1.5%. Prices have been accelerating since emerging from deflation in March. June retail sales (Friday) should see total sales slow sharply to 0.4% y/y from 5.7% previously, while larger retailer sales likely slid to 0.1% y/y from 8.2% in May. The remainder of Friday’s calendar will feature June unemployment, expected to fall to 2.9% from 3.0%, with the job offers/seekers ratio seen ticking up to 1.10 from 1.09. June industrial production is forecast rebounding 5.0% m/m from -5.9% previously. July consumer confidence is expected to dip to 37.0 from 37.4. June housing starts and construction orders are due as well. In China, the July official CFLP manufacturing PMI (Saturday) is expected to improve to 51.2 from 50.9. The highest reading so far in 2021 came in March, at 51.9, since idling on either side of 51.0 through June.

South Korea advance Q2 GDP (Tuesday) is expected to accelerate to a 5.9% y/y clip, up from 1.9% in Q1. The sharp rise comes on easy comparison to Q2 of 2020 when GDP fell 3.2% at the height of the pandemic. July consumer confidence (Wednesday) is penciled in dipping to 109.0 from 110.3. June industrial production (Friday) should be little changed at a 15.0% y/y pace from 15.6% previously. Hong Kong June trade deficit (Monday) is expected to narrow to HKD -15.0 bln from -25.8 bln. Q2 GDP (Friday)is forecast at a 7.9% y/y growth rate, from 7.9% in Q1. Taiwan June leading indicators are due Tuesday, with preliminary Q2 GDP (Friday) slowing to a 6.5% y/y rate from 8.9% in Q1.

Thailand’s June manufacturing production (Friday) is forecast to have risen at a 25.0% y/y rate, slipping from 25.8% previously. June trade and current account figures are due Friday. Malaysia releases June trade numbers (Wednesday) which should see the surplus narrow to MYT 10.0 bln from 13.7 bln. Singapore June manufacturing production (Monday) should rise 30.0% y/y, as it did in May. June unemployment (Thursday) likely remained steady at 2.9%.

Australia Q2 CPI (Wednesday) is estimated to have risen 1.0%% q/q up from the previous 0.6%. Q2 import and export prices (Thursday) should see the former up 1.0% from 0.2%, for the former, and up 12.0% from 11.2% for the latter. Q2 PPI (Friday) should war, to a 0.6% y/y pace from 0.4% in Q1. June building approvals are due Friday as well. New Zealand’s docket is light but will reveal the June trade report on Monday. The surplus is seen steady at NZ$0.5 bln.

EUROPE

Eurozone: the ECB did the expected and strengthened the dovish message on the rate outlook in the dovish guidance, with Lagarde suggesting its wait and see over the summer. Tapering talks will begin in earnest at the next meeting in September, which will also bring an updated set of staff projections. The decision on the future of PEPP, which is currently set to end in March next year may not be taken until later in the year, however, and will likely depend to a large extent on virus developments and how the recovery progresses.

This week’s very busy data calendar will likely confirm the strong rebound in economic activity that is increasingly prompting companies to take on staff, but also the uptick in headline inflation. Against the background of the ECB’s signal on rates, however, the numbers won’t have immediate policy implications, even if they are likely to confirm the central bank’s cautiously optimistic take on the outlook. As such, they should not lead to a widening of Eurozone spreads at this point, although yields are likely to nudge higher as confidence in the global recovery stabilizes. Virus developments will remain in focus though as travel is set to increase over the summer.

Survey data already signaled that economic activity rebound in the second quarter as virus restrictions were eased. We expect the preliminary reading for overall Eurozone GDP (Friday) to show a quarterly growth rate of 1.6% (med 1.5%) after a contraction of -0.3% q/q in the first quarter. National variations hinge largely on the extent and timing of virus restrictions and after the sharp decline in German activity in the first quarter, we expect German GDP to outperform now with a rebound of 2.2% q/q for Q2, but other countries are also set to report Q2 readings.

More forward-looking survey data is likely to confirm that the recovery continued at the start of the third quarter, even if capacity constraints and supply chain disruptions limit the room for a further acceleration in manufacturing growth in particular. German and Eurozone PMI readings came in better than anticipated, with manufacturing, as well as services sentiment, improving further. Against that background, we see German Ifo business sentiment (Tuesday) at 102.4 (med 102.3) – up from 101.8 in June. Similarly, the overall ESI economic confidence reading (Friday) is expected to lift to 118.9 (median 118.7) from 117.9 in the previous month.

With demand continuing to improve and the backlog of work rising, companies are not just starting to extend investment, but also to take on more staff, which means labor market data is improving again now. German July unemployment numbers (Friday) are seen falling -29.0K on a sa basis, which should bring the sa jobless rate to 5.8% (median same) from 5.9% in the previous month. The more backward-looking Eurozone unemployment rate (Friday) for June, is seen correcting to 7.8% (median 7.9%) from 7.9%, although the real situation in labor markets will of course only become apparent once wage support schemes have been phased out.

Labor market developments will also be decisive for the medium-term inflation outlook and the overriding question of whether the short-term overshoot will translate into higher wages and thus lead to second-round effects. For now, though, base effects from energy prices are keeping headline rates not just much higher than core inflation, but also above the ECB’s new inflation target. German HICP (Thurs) is seen jumping to 2.8% (median 2.9) from 2.1%, which should contribute to overall Eurozone HICP (Friday) reaching 2.1% y/y (median same) in July after 1.9% y/y in June.

Eurozone M3 numbers, French and Italian inflation and GDP data, German import prices and French consumption are also due next week, although likely to be overlooked in the middle of the general data deluge.

U.K.: much weaker than expected preliminary UK July PMI data, released last Friday, gave a timely insight on how the prevailing ‘pingdemic’ is impacting businesses. The UK has been experiencing a sharp third wave of the pandemic, though the high vaccination rate has greatly diminished the impact in terms of bad health outcomes, and societal restrictions have remained relaxed, and were in fact relaxed more this week. This circumstance has fostered an explosion in track-and-trace activity, leading to significant numbers of workers having to self isolate. But new cases are plateauing, and the track-and-trace system is scheduled to terminate in mid August.

The UK calendar this week is quiet. One issue to monitor is the Brexit agreement on the Northern Ireland protocol, which hasn’t been fully implemented due to cultural sensitivities. The Protocol curtails free trade between Northern Ireland and the rest of the UK, being a consequence of maintaining a free-flowing border with the Republic of Ireland. A grace period will come to an end on October 1, and the EU has steadfastly been rejecting UK demands for a renegotiation.

Switzerland: The calendar this week is highlighted by the release of the July KOF leading indicator (Friday). The median forecast is for an moderate abatement to a still-high reading of 130.0 after the 133.4 reading of the previous month. This would continue the correction from the record high that was clocked in May, of 143.7.

Events Week of July 26

Complete Calendar: Click here to view the complete calendar of all the events.

We have a heavy release docket in the final week of July. We expect GDP growth of 7.3% in Q2, as the updraft from stimulus marks a peak, while personal income falls sharply again in June as we further unwind the last Q1 stimulus package. We expect another solid durable orders gain in June led by Boeing, while advance indicators show a June widening in the goods trade balance. We expect a June gain for new home sales, alongside a new all-time high for the median price. The ECI should post another solid gain in Q2, leaving a hefty 2.9% y/y rise, while consumer confidence falls, alongside a lofty 1-year inflation reading.

Week of July 26

Last Monday’s equity market head-fake focused attention on the impacts of the delta variant, and the risk of renewed mandates. Our assumption remains that there will be little public buy-in to mandates anywhere other than a few big cities. Industries facing soaring prices and capacity constraints are unlikely to throttle output, though we may see a dampened service sector recovery, with consumption gains slightly more spread between Q3 and Q4 than previously assumed. We’ve seen weekly declines in the Langer consumer comfort index, and we’ve marked down our confidence forecasts for August, though our aggregate GDP forecasts are unchanged.

The policy response to the delta variant will be restrained in California by the September 14 recall election, where voters will face a two-question ballot. The first question is a yes-or-no vote on recall, and the second allows a replacement selection from among 45 candidates. Gaven Newsom’s party affiliation will not appear on the ballot due to a filing error by his office, and turnout in special elections is always low, so the outcome of the first question is far from clear. Polls suggest that Newsom will narrowly survive the first question, with recall losing 43% to 48%. If he doesn’t, the wide range of candidates make the results of the second question highly uncertain. We expect this uncertainty to limit actions at the state level, as well as in Los Angeles and San Francisco, though indoor mask mandates have now been adopted in LA.

Beyond news from the virus front, this week also included another dramatic update on the pace of home price appreciation, in the form of a 3.7% surge in the median existing-home sale price to a new all-time high of $363,300. We now have a four-month stretch of new all-time highs that are all well above the prior record-high of $313,000 in October of 2020, which itself capped a string of four consecutive new highs. The all-time high before this expansion was just $285,400 in June of 2019, so we are now 27.3% above that peak. The rate of ascent in Q2 was particularly steep, leaving the three largest monthly y/y gains in history, culminating with the 23.4% y/y June rise. The S&P Case Shiller and FHFA indexes are poised for huge May and June increases, and we may again see the counter-seasonal continued price rise in Q3 and Q4 that we saw last year, as the housing sector copes with an enormous supply-demand mismatch.

New Home Sales: 820k

We expect a 6.6% June climb for new home sales to a 820k pace, following a May dip to 769k from 817k in April. We’ve seen a 12-month stretch of sales through May that are at the highest rates since a 778k reading in July of 2007. We expect a median sales price rise to a new all-time high of $378,000 from a current all-time high $374,400 in May, leaving a y/y increase of 10.8%. We expect a 802k Q2 pace for new home sales, after a 901k rate in Q1. We’re seeing rapid growth in demand for new homes in 2021. Construction has lagged sales, and the market is heavily inventory-constrained. We expect a steady climb in starts and completions through 2021 in the face of unprecedented home demand, though the sector is pressing against capacity constraints, and growth in sales beyond lofty late-2020 levels has proven hard to sustain.

Durable Goods Orders: 2.3%

Durable goods orders are expected to rise 2.3% in June with a 6.0% rise in transportation orders, after the same 2.3% headline increase in May that included a 7.7% transportation orders bounce. The durable orders rise ex-transportation is pegged at 0.8%, after a 0.3% May increase. A defense orders gain is pegged at 3.1%, following a 15.4% May bounce. Boeing orders surged to a 3-year high of 219 planes, after a rise to 73 in May from 25 in April and a 2-year high of 196 in March. The vehicle assembly rate slowed to 8.9 mln in June from 9.7 mln in May. Durable shipments should rise 0.2%, and inventories should rise 0.7%. The I/S ratio is expected to tick up to 1.80 after two months at 1.79, versus a 2-year low of 1.74 in January and an all-time high of 2.39 in April of 2020 for a series extending back to 1992.

Consumer Confidence: 121.0

Consumer confidence is expected to fall to 121.0 from a 16-month high of 127.3 in May. We saw a 6-year low of 85.7 in April of 2020 and an 18-year high of 137.9 in October of 2018. We expect the present situation index to fall to 151.3 from a 15-month high of 157.7. The expectations index should fall to 100.8 from 107.0 in June, versus a 2-year high of 111.9 in March. We expect the 1-year inflation measure to remain at the 13-year high of 6.7% seen in June. The confidence updraft with Q1 stimulus checks and vaccines peaked in April, as all of the available confidence measures have posted a net pull-back since then that will be aggravated into August by the spread of the delta variant. Michigan sentiment fell to 80.8 in July, leaving it well below its 88.3 April peak. The IBD/TIPP index slipped to 54.3 in July, following the same 56.4 cycle-high in both April and June. The Langer index has fallen to a 52.3 average in July from a 55.7 cycle-high average in June.

Advance Indicators Goods Deficit: -$88.7 bln

We expect the advance indicators report to reveal a June widening in the goods trade balance to -$88.7 bln from -$88.2 bln in May and an all-time wide gap of -$91.9 bln in March. We expect exports to grow 2.1% to $147.9 bln, while imports grow 1.5% to $236.6 bln. Oil prices rose through June, hence providing a lift for petroleum sector trade, while trade in vehicles likely remained depressed in June after big 2021 declines through May attributable to semiconductor shortages. We expect a -$34 bln bilateral goods balance between the U.S. and China with elevated imports as U.S. businesses rebuild inventories largely with imported goods. We saw a -$43.1 bln all-time wide bilateral gap in October of 2018. The advance report should also reveal a June gain of 1.3% for wholesale inventories and -0.7% drop for retail inventories.

Advance Q2 GDP: 7.3%

We expect GDP growth of 7.3% in Q2, after the 6.4% Q1 pace, as the two rounds of 2021 stimulus and vaccine distributions reached its likely maximum upward impact in Q2, before the likely start of a gradual unwind of this updraft starting in Q3. We see the Q2 GDP growth clip as the likely “speed limit” for growth from capacity constraints, given widespread shortages, plunging inventories, and soaring prices through the middle of the quarter. We assume a solid 10.5% Q2 growth clip for consumption, but a more restrained 3.5% pace for business fixed investment, and a -6% contraction rate for residential investment as particularly severe shortages disrupt that sector. Exports and imports should grow at a 7%-9% rate while net exports subtract modestly, while inventories subtract from growth slightly in Q2 thanks to continued inventory liquidation. Government spending should start to unwind the stimulus boost in Q1. The chain price index should reveal a hefty 5.8% Q2 growth clip.

Initial Jobless Claims: 390k

Initial jobless claims are expected to fall -29k to a 390k after a rise to 419k in the BLS survey week, up from a 368k cycle-low in the week prior. claims may have tightened into the July 4th holiday but widened since then due to a counter-swing relative to the auto retooling seasonal pattern, which likely didn’t occur much this year. Claims are expected to average 387k in July, after averages of 393k in June, 428k in May, and 582k in April. The July BLS survey week reading just overshot last month’s reading of 418k, but was an improvement against the 444k in May, 566k in April, 765k in March, and 847k in February. We assume a 600k July payroll rise, following an 850k bounce in June.

Continuing claims fell by -29k to 3,236k in the week of July 10, following an upwardly revised 3,264k figure. We expect continuing claims to fall -44k to 3,192k for the week ending July 10. The downtrend in the continuing claims data has moderated since March, just as the drop in initial claims has picked up steam. Continuing claims are poised to fall about -220k between the June and July BLS survey weeks, after drops of -199k in June, -42k in May, -188k in April, -628k in March, -409k in February, -555k in January, and -705k in December.

Employment Cost Index: 0.9%

The employment cost index (ECI) is estimated to rise 0.9% Q/Q in Q2, after a 0.9% gain in Q1. We expect a 0.9% increase for wages and salaries and a 0.7% rise for benefit costs. As-expected gains would leave a 3.0% ECI y/y increase that beats the last expansions’ 2.9% cycle-high in Q4 of 2018, after a 2.6% pace in Q1. Wages and salaries would rise at a 3.2% y/y rate that would also beat the last expansion’s 3.1% cycle-high in Q4 of 2018, after a 2.7% pace last quarter. Benefits would be up 2.4% y/y, compared to 2.5% in Q1 and the last expansion’s 3.6% cycle-high in Q2 of 2011. Overall, compensation growth has remained solid through the 2020 pandemic and into 2021, following a modest cyclical uptrend into the start of the pandemic, likely due to shortages for many categories of labor despite pockets of labor market weakness in some areas.

Personal Income/Consumption: -0.8%/0.9%

We expect a -0.8% personal income decline after the -2.0% May drop, with a 0.5% June rise in compensation. The compensation rise reflects a 0.3% June gain for hourly earnings and 0.2% for hours worked. We expect a -5.5% June drop in “current transfer receipts” after an -11.7% May decline, as this measure tracks the pull-back in stimulus spending. We expect a 0.9% rise in consumption after a flat May figure. We expect a savings rate drop to 10.8% in June from 12.4% in May and a 27.6% peak in March, versus a 13.1% prior low in November. We saw prior peaks of 20.7% in January and 33.7% in April of 2020. We peg disposable income at -23.5% in Q2, after a 68.0% surge in Q1, and contraction rates of -6.2% in Q4 and -14.4% in Q3. We expect a growth rate for real consumption of 10.5% in Q2, after growth rates of 11.4% in Q1, 2.3% in Q4, and 41.0% in Q3.

Michigan Sentiment, Revised: 80.8

We expect the revised Michigan sentiment report to reveal a repeat of the 80.8 preliminary figure for July, following an 85.5 level in June, versus an 88.3 cycle-high in April and a 6-month low of 76.8 in February. The first release had current conditions at 84.5 from 88.6 in June, following a 97.2 cycle-high in April and a 4-month low of 86.2 in February. Expectations fell to 78.4 from an 83.5 cycle-high in June, versus a 3-month low of 70.7 in February. The 1-year inflation surged to a new 13-year high of 4.8% from 4.2% in June and a prior 13-year high of 4.6% in May that matched highs in April and March of 2011. The 5-10 year inflation measure rose to 2.9% from 2.8% in June and a 10-year high of 3.0% in May that was last seen in 2013. The confidence updraft with Q1 stimulus checks and vaccines peaked in April, as all of the available confidence measures have posted a net pull-back since then.