Report (Premium Edition) 09-27-2021

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.

LastCHG %CHGHIGHLOWTREND
Dow34798.010.10%33.1834857.0634648.08Neutral
S&P 5004455.470.15%6.484463.124430.27Bull
Crude (WTI)75.251.17%1.28975.37373.961Bull
Gold1749.48-0.04%-0.71760.711744.73Bull
10 Year148.90%2.41%0.0351.4961.444Strong Bull
Bitcoin/USD435370.76%3294438742959Bear
US Dollar Index93.4350.17%0.15893.4993.208Strong Bull
VIX18.665.13%0.9118.8417.74Neutral

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. Following the Supreme Court ruling stopping the eviction moratorium, 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.

Sector Name5-Day Return1-Month Return3-Month ReturnYTD ReturnYTD Return vs S&P 5003-Year Return5-Year ReturnTrend
 Basic Materials0.10%-4.30%-1.60%14.00%-4.20%39.10%83.30%Bear
 Communication Services-0.40%-0.50%1.80%21.90%3.70%73.80%68.20%Neutral
 Consumer Cyclical0.60%1.40%3.40%17.30%-0.80%86.90%174.10%Bull
 Consumer Defensive-0.40%-1.20%2.20%7.20%-10.90%40.50%52.20%Bear
 Energy4.60%7.70%-6.10%43.10%24.90%-23.00%-7.50%Bull
 Financial Services1.90%0.50%4.80%31.10%12.90%41.50%111.30%Strong Bull
 Healthcare-0.50%-1.80%4.80%15.70%-2.50%50.00%105.00%Bear
 Industrials1.10%-2.00%-1.10%14.80%-3.40%36.90%91.60%Bear
 Real Estate-0.90%-0.40%3.20%25.80%7.60%45.60%45.10%Bear
 Technology0.90%0.00%7.50%19.80%1.70%116.10%272.90%Bull
 Utilities-1.10%-4.30%3.00%5.70%-12.50%32.30%49.50%Bear

Key Drivers for the Week of Sept. 27, 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.

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  • Hawkish pivots from central banks drives bond yields sharply higher
  • FOMC stated QE tapering could begin soon, end in mid 2022; 10-year rate 1.45%
  • U.S. data includes ISM, durables, income, consumption, and confidence on tap 
  • Treasury auctions $183 bln in coupons: $60 bln 2s, $61 bln 5s, $62 bln 7s
  • Bevy of Fedspeakers should voice support for likely QE tapering “soon” 
  • U.S. fiscal policy complicates with possible government shutdown
  • Canada GDP expected to show further erosion in growth; holiday Thursday
  • Japan services PPI, production, retail sales, unemployment, housing starts
  • China PMIs should reflect slowing; Bank of Thailand seen on hold
  • German elections may not yield clear winner for Chancellor Monday
  • Eurozone CPI, ESI economic confidence, PMI, unemployment   
  • German data on HICP, jobless numbers, retail sales
  • UK Q2 GDP expected solid, CIPS manufacturing PMI due

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: Bonds Bears & Biden Test

NORTH AMERICA

Congress & Debt Ceiling

The big mover this week is Congress as it tries to pass three key bills (infrastructure, social/green bill, and debt ceiling). Fiscal 2021 ends on September 30 and without legislation to extend or suspend the debt limit, the government faces a shutdown. As usual, the necessary legislation is being used as a political football, with the deep divide between the Democrats and Republicans making for a particularly difficult scenario this time around. Something will eventually be passed but at what cost. Here is what is being debated.

The infrastructure bill: This bill is about $1 trillion and passed in the US Senate with bipartisan support. The current state of the bill is unacceptable to most Democrats in the US House because it doesn’t include their political projects such as “clean energy, social justice, etc.”

The social and environment spending bill: This $3.5 trillion is the House Democrats’ response to the slimmed-down “infrastructure bill.” It has chuck full of political agendas, taxes, and a new “green energy plan.”

Debt Ceiling: According to our watches, Congress has until Thursday to pass a bill to raise the debt ceiling. If they fail to do so, then we could see a shutdown of the government.

Legislative Battleground: House Democrats and Biden want to pass the increased $3.5 trillion spending bill without Republican support through budget reconciliation. However, they need Sen. Joe Manchin and other moderate Democrats’ support. Manchin has stated publically he won’t support the bill. Failure to pass the bills will reflect on Biden who has increasingly looked weaker with his failure at Afghanistan and the Border.

Scenario 1: I think it is highly likely the Democrats in the House will pass the increased spending bills (at a slightly lower level) and debt ceiling limit bill in order to put extreme pressure on moderate Democrat Senators and Republicans. This will go over like “a fart in church” and cause a shutdown or serious shutdown scare as all bills fail to pass. The market will likely drop 3-10%, but could partially recover if the debt ceiling bill is passed in order for Congress to debate more. The key thing to know is that the Democrats and Biden are using the debt ceiling limit to create a sense of urgency to pass their spending bills. They will not want to give this away and will signal defeat for them. However, they don’t want to be blamed for a government shutdown.

Scenario 2: House Democrats pass the debt ceiling bill, infrastructure bill, and a much lower spending bill (say $1 trillion vs. $3.5) that Democrat Senators can support. I think this is the best strategy for Democrats as it allows a much-needed win for both them and Biden while avoiding a government shutdown. However, I am unsure that Pelosi has the support for this and it is unknown how moderate Democrat Senators will react to it. The market will likely not respond or be positive as it will signal “business as usual.”

Scenario 3: House Democrats fail to pass any bills and we have a government shutdown. Expect a full blame game between the Democrats, Republicans, and Biden. The market will likely drop 3-10% and will not come back until the shutdown is over.

Back to the Markets

It is a busy U.S. calendar this week with a number of important indicators. None will have much market impact individually, but all will contribute to the Fed’s overall policy calculus where many on the FOMC now believe the “substantial further progress” conditions for QE tapering have been met. Chair Powell has been more cautious given his concerns over the “substantial slack” in the job market. But he too is leaning toward scaling back asset purchases this year.

The condition for the labor market is “all but met” on a cumulative basis he noted last week. Hence, it won’t take much improvement in the job numbers to satisfy him and get his vote on tapering. We suspect that announcement comes in November.

While ISM, durables, income, consumption, and confidence will be monitored, fiscal policy will distract with the debt limit and a possible government shutdown looming at fiscal year-end (September 30), while negotiations on the big spending and tax bills are on tap as well.

The Treasury’s $183 bln in 2-, 5-, and 7-year auctions will also be interesting in this environment with a more hawkish Fed, a QE tapering on the way, and still hot inflation. There is a bevy of Fedspeak and we expect they will voice their support for a taper announcement later this year.

The September ISM (Friday) highlights as it includes timely information on manufacturing employment, production, inventories, and prices. We expect the index to dip back -0.4 ticks to the 59.5 level from July, versus the 59.9 in August. The slippage from the 18-year high of 647 in March largely reflects the negative impacts from materials and labor shortages and other supply constraints, rising prices, the spike in the Delta variant, and the waning impact of stimulus checks. All of the sentiment indicators have dropped on net through July-August from prior peaks, and we expect further declines into late-2021 toward more historically typical levels.

Other reports this week include August Advance durable orders where we forecast a 0.5% increase after dipping -0.1% in July. Support should come from a 0.5% bounce in transportation orders. September consumer confidence is expected to rise to 115.0 after a drop to 113.8 in August. A 0.2% gain in personal income is forecast for August, with spending rising 0.6%. Q2 Q2 GDP should be revised up to a 7.0% pace of growth, though the more relevant Q3 pace is now projected slowing to a 5.4% clip.

US 10YR broke through resistance and climbing high again.

Supply heats up this week with $183 bln in shorter-dated coupons on offer. Because of the calendar, the Treasury will have to double up on auctions Monday with the $60 bln 2- and the $61 bln 5-year offerings on tap, to be followed by the $62 bln 7-year on Tuesday. When issued yields jumped late last week due to the FOMC’s pivot, and the concessions saw the 2-year rise to 0.300%, with the 5-year at 0.970%, and the 7-year at 1.27%. The doubling up on auctions typically makes for poor results, and this could be the case again this week. The cheapening in rates may provide little consolation as the Fed’s pivot and the bearish trend may keep bulls sidelined.

For Canada, GDP is front and center this week. The report is expected to show further erosion in the economy following the surprising drop in Q2 GDP. Our projection is for a -0.3% drop in July GDP (Friday) after the 0.7% jump in June. However, the outlook for August is looking up, with growth anticipated to have bounced back last month. The industrial product price index for August is due Wednesday. There is nothing from the BoC this week. The bond market is closed on Thursday for the National Day for Truth and Reconciliation, although the stock market will be open

ASIA

Japan’s heavy month-end data slate will feature this week, and will include August industrial production, retail sales, unemployment, manufacturing PMI and consumer confidence. China releases the official CFLP manufacturing PMI for September, along with the Caixin/Markit PMI. Markets will keep a close eye on China in the coming weeks and months, where growth rates are expected to slow as consumers pull back, as supply chains disrupt, and as the regulatory crackdown continues to unnerve and raise red flags. The only central bank meeting comes from Thailand’s BoT which is expected to leave policy unchanged, with rates at o0.50%. Elsewhere in the region data on trade and production will be important indicators. Much of this week’s data should reflect the slowing in growth resulting from the pick up in the Delta variant and the various supply disruptions that have limited, manufacturing, and production.

Japan’s docket kicks off with August services PPI (Monday). August preliminary industrial production (Thursday) should rise 0.7% y/y versus the -1.5% previously. August retail sales (Thursday) are forecast slowing slightly to a 1.0% y/y rate from 1.3% for large retailers, and to 2.0% y/y from 2.4% for total retail sales. August housing starts and construction orders are also due Thursday. The remainder of the releases are due Friday, featuring August unemployment, seen dipping to 2.7% from 2.8%.

The job offers/seekers ratio is expected steady at 1.15. The Q3 Tankan is expected fractionally higher at 15 from 14 for large manufacturers, and at an unchanged 1 for large non-manufacturers. The September manufacturing PMI is penciled in at 52.5 from 52.7. It has been hovering over the 52 mark since March. September consumer confidence is estimated at 37.5 from 36.7. September auto sales are also due. The BoJ releases minutes from the July 15-16 MPM (Tuesday) and the summary of opinions from the September 21-22 MPM (Friday).

In China, the September official CFLP manufacturing ISM (Thursday) is expected to improve to improve to 50.5 from 50.1. The series had been trending lower from March highs of 51.9, reflecting the slowing in activity due to the spike in covid, as well as the difficulties in manufacturing/production from chip shortages. On that note, the Caixin/Markit manufacturing PMI (Thursday) has slumped into contractionary territory, dropping -0.8 ticks to 49.2 in August. We suspect it will bounce slightly to 49.5. These would be the first back-to-back sub-50 prints since June and July 2019.

Taiwan has August industrial output (Monday) and it is expected to slow slightly to a 13.5% y/y rate from 13.9%. August leading indicators are due Monday as well. South Korea September consumer sentiment (Tuesday) is seen steady at 102.5. It rose through the spring to a high of 110.3 in June but has been slumping since. August current account figures are due Tuesday as well. August industrial production (Thursday) is forecast little changed at an 8.0% y/y clip from 7.9%, but it has moderated from 14.5% in May.

The September trade surplus (Friday) should widen to $3.5 bln from $1.7 bln. Hong Kong has the August trade report (Tuesday) with the deficit set to narrow to HKD 34.0 bln from 35.0 bln. August retail sales (Thursday) are seen inching up to 3.0% y/y from 2.9% on a value basis, and 1.0% y/y from 0.9% on a volume basis. Malaysia August trade (Tuesday) should see the surplus widen to MYR 15.0 bln from 13.7 bln. In Thailand, the BoT meets (Wednesday) and is seen on hold with the o/n repo rate at 0.50%. The Bank had cut rates four times since late 2019, from 1.50%. August manufacturing production is due Wednesday too. Thursday brings the August trade report, with the surplus seen widening to $1.0 bln from $0.2 bln. Indonesia September CPI (Friday) is penciled in at 1.4% from 1.6%.

In Australia, a light docket has August building approvals (Thursday), seen falling -7.0% on the month from -8.6% previously. August housing finance (Friday) should dip 0.3% from the -0.4% previously. There are no events from the RBA on tap. New Zealand’s calendar is empty, though focus will shift to October 6 when the RBNZ next meets. The Bank is expected to hike rates to 0.50% from 0.25%. The Bank surprised markets by leaving rates unchanged at its last meeting.

EUROPE

Eurozone: Germany’s election on September 26 will mean the end of the Merkel era, but if current opinion polls are anything to go by, it won’t be clear yet on Monday who will succeed her as Chancellor of the Eurozone’s largest economy. Anything suggesting possible participation of the Left Party in government will be market negative, but the impact of all the other permutations will depend on who sits in the driver’s seat of a coalition government that is likely to involve three rather than two parties. There could be a lengthy period of uncertainty while the leading parties try to come to an agreement and anything short of a last-minute surge in support for Merkel’s conservative CDU/CSU alliance would likely see investors taking a cautious stance to come Monday.

ECB’s Lagarde meanwhile continues to call the scaled back asset purchase targets a re-calibration rather than tapering, but it is clear that in the central scenario global central bank support will gradually be reduced. Downside risk now seems to become less from virus developments then China’s inflated property sector, which markets, in particular, are increasingly keeping a weary eye on. There will be plenty of opportunity for central bankers to tell investors their view of things, with ECB President Lagarde speaking at a European Parliament hearing at the start of the week and a wealth of global central bankers scheduled to talk at the ECB Forum on Central Banking.

Data releases this week will focus preliminary September inflation readings, which are likely to bring another jump in the headline rate. Officials have already flagged that temporary factors will likely see inflation peaking only later in the year and at rates far above the ECB’s medium term target. The recent surge in gas and energy prices will add to pressures and depending on weather developments, inflation could even be higher than current projections suggest. The key question though is how lasting this will be and that won’t be answered by September numbers alone. So while German HICP (Thursday) is seen lifting to 3.9% y/y (median same) and the Eurozone reading CPI (Friday) set to hit 3.3% (median same), it won’t be enough to cement the outlook for the ECB.

Indeed, confidence data are suggesting a slight deceleration in the pace of expansion and not just due to global supply chain disruptions. PMI surveys indicated that the decline in the preliminary Manufacturing PMI also reflected a slowdown in orders growth and final readings (Friday) are likely to confirm that. Still, the headline is likely to be left at 58.7 (median same), which still signals ongoing robust growth ahead. The European Commission’s ESI Economic Confidence Indicator (Wednesday) is likely to confirm this picture, although after the unexpected improvement in consumer confidence data reading may weaken less than PMI readings.

Against that background, we expect ongoing improvements on labor markets, as companies continue to sit on a large pile of orders and the services sector continues to re-open. German jobless numbers (Thursday) are seen falling a futher -30K (median -25K), which should leave the sa jobless rate at 5.5% (median same) in the September reading. The less up-to-date unemployment rate for the Eurozone as a whole (Thursday), is likely to ease back to 7.5% in August readings, from 7.6% in July.

The pretty busy calendar also includes Eurozone M3 money supply growth, French consumer spending data, and German retail sales.

U.K.: the BoE continued to inch towards a reduction in stimulus and the latest meeting has seen the markets bring forward rate hike expectations further as inflation continues to spike. As in the Eurozone much of the uptick is due to temporary factors, including the sharp spike in gas prices not just in the U.K., but across much of Europe. The U.K. though has very low levels of storage compared to its European neighbours and coupled with staff shortages across many key sectors that could add to problems for the U.K. economy over the winter.

Data releases this week are unlikely to change the outlook too much. The third reading of Q2 GDP is expected to confirm quarterly growth at a strong 4.8% q/q with the re-opening of the economy after a very strict lockdown the main driver. The CIPS Manufacturing PMI (Friday) meanwhile is likely to be confirmed at 56.3 (median same), in the final reading for September, suggesting a slow down in the pace of expansion. Supply chain disruptions, staff shortages and the impact of spiking energy prices are key factors, with knock on effects from the rise in gas prices even impacting sectors such as food production and storage. Money supply and lending data are also due.

Switzerland: The calendar this week includes the KOF leading indicator for September. The SNB just confirmed its very expansionary monetary policy stance and its commitment to intervene on global forex markets if necessary and will look less to survey numbers, but developments in the CHF and of course at global central banks ahead of the next policy review in December.

Data Week of September 27

We have a busy calendar into the end of September. We expect a Q2 GDP growth boost to 7.0% from 6.6%, a modest August personal income rise with a bigger consumption gain. Durable orders should rise modestly in August, while the goods trade balance narrows and inventories climb. We expect a small August construction spending rise, a September consumer confidence bounce after a big August pull-back, a September down-tick in the inflation expectations gauge from a 13-year high, and small further September declines for the ISM and ISM-NMI.

Week of September 27

Vehicle industry reports suggest that inventories in the sector continue to tighten due to the semiconductor shortage, closed ports in Asia, and clogged ports in the U.S. Given assumed ongoing assembly disruptions, we’ve lowered our Q3 GDP estimate to 5.4%, and we now expect a fifth consecutive inventory-related decline in vehicle sales in September, of -4%, to a 16-month low of just 12.5 mln. We now expect a -0.3% September auto-led decline for retail sales, and we assume declines in the trade deficit through both August and September related to the various bottlenecks. Shortages are showing no sign of abating, and will probably continue well into 2022, with upside price pressures along with them.

The housing data released through the week tracked our assumption that the sector will post counter-seasonal growth on an SA basis, with a rebound now as we move past the peak season in the spring. Capacity constraints likely crimp NSA levels, and builders will use the fall and winter to play “catch up” on missed sales opportunities through the spring. Builders are heavily lot-constrained, and the building of multi-family units is gaining steam over single family units because those builders are willing to pay the biggest premium for scarce lots. As local governments continue to open new lands for development, builders will commit to large development tracks through the winter and early-2022, locking in place at least another year of breakneck building.

Note that many housing metrics are still short of the peaks set in the 2005-06 housing frenzy, though the critical “starts under construction” metric is poised to set a new all-time high before the end of the year. Permits and starts are measured early in the building process, so we expect a continued climb in completions and new home sales throughout 2022. New home sales posted a spring pull-back following the peaks last winter, and even if we see a counter-seasonal run-up into this winter, the figures are no where near the 1,389k peak in July of 2005. Indeed, even though the 740k August new home sales pace sits close to the high from the last cycle of 756k in January of 2020, it is only 53% of the prior 2005 peak. There’s plenty of room for the various housing measures to continue to climb.

Durable Goods Orders: 0.5%

Durable goods orders are expected to rise 0.5% in August with a 0.5% gain for transportation orders, after a -0.1% headline decrease in July that included a -2.1% transportation orders decrease. Durable orders ex-transportation is pegged to rise 0.5%, after a 0.8% July increase. Defense orders are pegged at -12.1%, following a 21.6% July pop. Boeing orders rose to 53 planes, after dipping to 31 in July from a 3-year high of 219 in June. The vehicle assembly rate improved to 9.5 mln from 9.3 mln in July. Durable shipments should rise 0.2%, and inventories should rise 1.0%. The I/S ratio is expected to tick up to 1.77 from 1.76 in July, 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.

Advance Indicators Goods Deficit: -$84.0 bln

We expect the advance indicators report to reveal an August narrowing in the goods trade balance to -$84.0 bln from -$86.8 bln in July and an all-time wide -$92.0 bln in June. We expect exports to grow 0.7% to $149.0 bln, while imports fall -0.7% to $233.0 bln. Oil prices eased through August, which will weigh on petroleum sector trade, while trade in vehicles likely weakened after a temporary bounce in July but big prior 2021 declines through May attributable to semiconductor shortages. We expect a seasonal widening in the bilateral goods balance between the U.S. and China to the $34 bln area, and trade will be crimped going forward by the closure of Chinese ports and big west coast backlogs in the U.S. We saw a -$43.1 bln all-time wide bilateral gap in October of 2018. The advance report should also reveal an August gain of 1.0% for wholesale inventories and 0.7% for retail inventories.

Consumer Confidence: 115.0

Consumer confidence is expected to bounce to 115.0 after a drop to 113.8 in August. 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 rise to 148.0 from 147.3. The expectations index is expected to climb to 93.0 from 91.4 in August. We expect the 1-year inflation measure to ease to 6.7% from a 13-year high of 6.8% in August. Confidence faces a mounting headwind from the delta variant and resumed mask requirements, while the prior confidence updraft with stimulus and vaccines has dissipated since April, and nearly all the major confidence measures have fallen since June. Michigan sentiment bounced slightly to 71.0 from a 10-year low of 70.3 in August. The IBD/TIPP index plunged to 1-year low of 48.5 in September from 53.6 in August and a 1-year high of 56.4 in June. The Langer consumer comfort index has averaged 57.8 thus far in September, following a cycle-high monthly average of 56.6 in August, and a weekly high of 58.2 at the end of August.

Initial Jobless Claims: 330k

Initial jobless claims are expected to fall -21k to 330k after a climb to 351k in the BLS survey week from 335k prior to that, leaving the measure well above the 312k cycle-low in the week of September 4. The bulk of last week’s spike was in California, while the boost from hurricane Ida unwound given the pullback for claims in Louisiana. Claims are poised to average 332k in September, after 352k in August, 394k in July, and 394k in June. The 349k August BLS survey week reading was well below July’s reading of 424k, as well as the 418k in June, 444k in May, and 566k in April. We assume a 475k September payroll rise, following the lean 235k August gain, but prior outsized 1,053k July increase.

Continuing claims rose by 131k to 2,845k in the week of September 11, following an upwardly revised 2,714k figure. We expect continuing claims to decline to 2,750k for the week ending September 18. Continuing claims have fallen sharply since late-July, and we assume some flattening in this steep downtrend into Q4. We saw continuing claims to fall by -63k between the August and September BLS survey weeks, after drops of -388k in August, -116k in July, -199k in June, -42k in May, and -188k in April.

Final Q2 GDP: 7.0%

We expect a Q2 GDP growth boost to 7.0% from 6.6%, with hikes of $7 bln for inventories, $4 bln for consumption, $4 bln for nonresidential construction, and $3 bln for net exports. The Q2 GDP growth pace is a good gauge of the “speed limit” for the economy, given widespread supply constraints. The Q2 GDP figures document a continued consumption boom from two rounds of fiscal stimulus during Q1 and vaccine distributions, a diminished updraft for business fixed investment, and a pull-back in residential investment following an enormous boom to a Q1 peak. Exports and imports continued to climb sharply, while net exports continued to subtract from GDP. Inventories liquidated further through Q2, and were in net liquidation through four of the six quarters through Q2, as capacity constraints have limited the ability of producers to meet demand.

Personal Income/Consumption: 0.2%/0.6%

We expect a 0.2% August personal income gain after the 1.1% July bounce, with a 0.7% August rise in compensation. The compensation rise reflects a 0.6% August gain for hourly earnings and a 0.2% rise for hours worked. We expect a -1.6% August drop in “current transfer receipts” after a 2.9% July rise that reflected payments for the child care tax credit. We expect a 0.6% rise in consumption after a 0.3% July gain. We expect a savings rate drop to 9.2% in August from 9.6% in July, versus prior stimulus-induced peaks of 26.6% in March, 19.9% in January, and 33.8% in April of 2020. We peg disposable income growth at 1.3% in Q3, after a -26.5% plunge in Q2 and a 60.6% surge in Q1. We expect a growth rate for real consumption of 2.4% in Q3, after growth rates of an estimated 12.0% (was 11.9%) in Q2 and 11.4% in Q1.

Construction Spending: 0.3%

Construction spending is expected to grow 0.3% in August, after a 0.3% rise in July and a flat figure in June. We expect a 0.7% private residential construction rise after a 0.5% July increase, a -0.1% figure for public construction after a 0.7% July rise, and a flat figure for private nonresidential investment after a -0.2% July rate. We expect construction spending to grow at a 3.6% pace in Q3, following rates of 4.3% in Q2, 16.0% in Q1 and 10.4% in Q4. Construction hours-worked from the jobs report was flat in August, and construction jobs fell -3k. Construction spending is heavily constrained by capacity limits for labor and land in the residential market, while nonresidential and public construction continues to contract, with geographic and skill differences capping labor migration between sectors. All the housing measures have rebounded to 14-year highs at various moments since Q3 of 2020, alongside persistent new record-highs for the home price measures. A residential construction uptrend at the capacity constraint has been locked in through at least early 2022.

ISM/ISM-NMI: 59.5/61.0

The ISM index is expected to fall to 59.5 from 59.9 in August, compared to an 18-year high of 64.7 in March, an 11-year low of 41.5 in April of 2020, and an all-time low of 30.3 in June of 1980. The ISM-NMI index is expected to fall to a still-robust 61.0 from 61.7 in August and a 64.1 all-time high in July. We saw an 11-year low of 41.8 in April of 2020, and an all-time low of 37.8 in November of 2008. Producer sentiment is unwinding the lofty peaks over the March-May period as the lift from stimulus wanes and headwinds from the delta variant kick-in, though levels remain robust, and the early sentiment indicators for September rebounded sharply. All the sentiment indicators declined on net through July-August from prior peaks, and we expect further declines into late-2021 toward more historically typical levels.

Michigan Sentiment, Revised: 71.0

The final Michigan sentiment report is assumed to show a repeat of the preliminary figures, which revealed a modest September rise to 71.0 from a 10-year low in August of 70.3, leaving two readings that undershot the pandemic-bottom of 71.8 in April of 2020. We saw a cycle-high of 88.3 in April. Expectations rose to 67.1 from an 8-year low of 65.1 in August, versus an 83.5 cycle-high in June. Current conditions fell to a 17-month low of 77.1 from 78.5 in August, versus a 97.2 cycle-high in April. The 1-year inflation gauge bounced back to the 13-year high of 4.7% that was last seen in July, from 4.6% in August. The 5-10 year inflation measure edged up to 2.9% in August and September from 2.8% in June and July, versus a 10-year high of 3.0% seen in May, and previously in 2013. The confidence measures have posted a July-August pull-back with headwinds from the delta variant, resumed mask requirements, and events in Afghanistan, following the prior confidence updraft with stimulus and vaccines has dissipated since April. Surveys available thus far in September suggest some flooring, and perhaps a rebound, after summer declines.

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