Report (Premium Edition) Updated 07-12-2021

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 12, 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.

• Reflation trade questioned as various factors slow global growth 
• Earnings season starts and should move stocks around a bit
• Production and sales stymied by bottlenecks, hiring difficulties, rising prices
• Central bank meetings: BoC, BoJ, BoK, RBNZ, all seen keeping rates flat
• Fed Chair Powell delivers semi-annual Monetary Policy Report Wed, Thurs
• U.S. data includes CPI, PPI, retail sales, production, consumer sentiment
• Treasury auctions $120 bln in 3-, 10-, and 30-year maturities
• BoC expected to keep the policy rate unchanged but should trim QE further
• BoJ: rate is seen steady but likely to downgrade growth, bump up inflation forecasts
• Japan economic reports: PPI, core machinery orders, tertiary index, production
• China releases trade, GDP, retail sales, fixed investment reports
• Eurozone HICP due, along with readings from Germany, France, Spain, Italy
• UK calendar has CPI inflation report and labor market data

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: Deflating the Reflation Trade

The Dow was up 1.3% to 34,870, with the S&P 500 1.13% firmer to 4369, while the NASDAQ rose 0.98% to 14,701. The dollar firmed up, rebounding after weakening on Friday. The DXY dollar index lifted out of a six-day low and pegged a high at 92.35, which reversed over half of Friday’s decline. The rebound in risk appetite unwound the safe-haven demand for Treasuries yields subsequently surged, mostly wiping out the week’s gains after longer rates plunged Thursday to February lows. 

Concession building ahead of the advent of supply also added to the selloff. The long end underperformed with the 10- and 30-year rates cheapening over 6 bps in a bear steepening trade. The Fed’s release of the prepared Monetary Policy Report for Chair Powell’s Humphrey-Hawkins testimony did not break new ground and hence had no impact.

Stocks and bonds reversed course into the weekend, with Wall Street recovering while Treasuries hit the skids. There wasn’t a real catalyst for the move. It seems the worries over the Delta variant and concerns over a slippage in growth that weighed on investors were quickly forgotten. Equity bears put the brakes on selling, and the emergence of bottom fishers lifted the major indexes to more to fresh all-time highs. 

The reflation trade looks to be deflating slightly as Q3 opens after a massive post-pandemic surge. And signs of the deceleration inactivity, especially in China and the U.S., the engines of global growth so far, have made investors increasingly nervous, with the widening spread of the Delta variant exacerbating worries. Ironically, some of the slowing has come not from an erosion in spending but from a surge in pent-up demand that is outstripping supply. And, the shortages in material inputs and difficulties in hiring will remain constraints ahead, as will the resulting rise in prices as bottlenecks thin already low inventories. 

These factors are likely to keep central banks in uber accommodative mode ahead. Notably, China’s PBoC cut its RRR last week amid concerns over the recovery. 

BEAR ALERT

I believe we could be looking at a dip in the market very soon for a couple of reasons:

Supply Chain Issues & Christmas Season:  The supply chain issues are likely to continue through the Christmas season. A huge amount of retailers rely on sales during this time to be profitable. If they don’t have the products, they can’t sell. I visited retailers like Best Buy, and the supply is currently very low.  

Budget Battle & Infrastructure Bill: Sen. Reid just sent out a note to Senators that their priority after coming back from the Summer break is to pass a budget and Infrastructure Bill. The Democrats will likely use (or try) “reconciliation” to pass a budget bill that needs to keep the government open and Infrastructure Bill to keep their party supporters happy.  This means that there will not be a “bi-partisan” bill and likely result in the GOP digging in. Senators Joe Manchin and Kyrsten Sinema will be the focus on both sides because the Democrats need both for their “reconciliation.” The Shutdowns have been polled to be damaging to the Republicans in the past, so it is risky if they go there immediately. 

200 1D Moving Average: According to BofA’s chief market technician Stephen Suttmeier, the S&P 500 has revisited its 200-day moving average in the second half of the year in 21 out of 35 years in which the S&P did not close below its 200 moving average the first half of the year. This puts it at a 60% chance of dropping. However, the chance is much higher because the S&P only stayed above the 200MA only 13 times (14%) for a calendar year going back to 1929.  

Rising Inflation:  Last week, the Dallas Federal Reserve warned that the period of moderate price pressures is coming to a close and that prices of goods could see a significant increase in coming months. Many consumer goods companies are reducing the size of the products while keeping the same prices. June the CPI will be released Tuesday before the testimony. We expect increases of 0.4% for the headline and 0.3% core, following respective May gains of 0.6% and 0.7%. A 3.0% jump in gas prices should boost the headline. Results in line with our projections would leave the 12-month headline slipping marginally to a 4.8% y/y clip from 5.0% y/y, with the core rising to a 3.8% y/y rate versus 3.0% y/y.

The bottom line

I could include several other analysts’ reports, but I think you get the point. A dip is likely to come in the second half of 2021. The increased number of retail investors and use of margin will likely increase the drop fast. Market Bull’s only hope is for a solid Christmas sales season could pull the market up, but they will need products to sell.  

Today’s calendar is light. It includes just the Treasury’s $58 bln 3-year and $38 bln 10-year (reopening) auctions. There is also some Fedspeak from Kashkari. Later in the week, much of the focus will be on Fed Chair Powell’s Monetary Policy Report to Congress beginning Wednesday.

The data slate is heavy with CPI, retail sales, production, and confidence numbers. It is also the start of earnings season, with the banks again kicking off the announcements.

NORTH AMERICA

This week’s U.S. calendar will reflect all of the supply and demand dynamics note above. Additionally, Fed Chair Powell will discuss these elements in his semi-annual Monetary Policy Report, aka Humphrey-Hawkins, in his testimony to Congress (Wednesday, Thursday). The data slate is heavy with retail sales, CPI, PPI, trade prices, industrial production, regional PMIs, and consumer sentiment reports. However, Powell’s testimony will break any new ground on the policy front, while the economic reports will be too distorted and noisy to provide a clear fundamental picture of the economy. However, the numbers will help gauge the extent to which economic growth will moderate over the second half of the year. To top it all off, it is the start of another earnings season.

The Fed released the written testimony for this week’s semi-annual Monetary Policy Report to Congress last Friday ahead of Chair Powell’s trip to Capitol Hill, first before the House Financial Services Committee (Wednesday 12 ET) and then will reprise the testimony (Thursday 9:30 ET) to the Senate Banking Committee. The prepared remarks didn’t break any new ground. It repeated that while vaccines, along with support from monetary and fiscal policies have supported the economy, the pandemic continues to weigh while employment has remained “well below pre-pandemic levels.” The Fed also noted that shortages in material inputs and difficulties in hiring held down activity in a number of areas.

Also, the bottlenecks and other largely transitory factors have boosted PCE prices, though the Fed elaborated a bit, noting that “more lasting but likely still temporary” upward pressures have come from supply chain bottlenecks, while other prices such as airfares have moved up sharply to more normal levels as demand has recovered. And on QE, the Report reiterated that the purchases will continue “at least at this pace until substantial further progress has been made. The testimony will overshadow Fedspeak from Kashkari, Evans, and Williams, along with the Beige Book.

Meanwhile, there is a slew of important data on tap. June the CPI will be released Tuesday before the testimony. We expect increases of 0.4% for the headline and 0.3% core, following respective May gains of 0.6% and 0.7%. A 3.0% jump in gas prices should boost the headline. Results in line with our projections would leave the 12-month headline slipping marginally to a 4.8% y/y clip from 5.0% y/y, with the core rising to a 3.8% y/y rate versus 3.0% y/y.

Widespread production bottlenecks are lifting all the broad inflation metrics in 2021, adding to base effects and we anticipate peak y/y gains over the May-June period. While the FOMC continues to interpret the Q2 inflation spike as “transitory,” it is not clear if upward commodity price pressure will abate in late-2021. Other inflation numbers this week include PPI (Wednesday), trade prices (Thursday), along with price components in the regional PMIs (Thursday), and consumer sentiment (Friday).

Another focal point will be June retail sales (Friday), where we forecast an -0.8% drop in while the ex-auto component should be unchanged after respective May prints of -1.3% and -0.7%. An unwinding of the bullish effects from the stimulus checks and the lack of auto inventories amid microchip shortages should weigh on headline sales. And we expect a steady pull-back through the quarter.

Industrial production (Thursday) should rise 0.5% in June after climbing 0.8% in May. Production should get a lift from utilities amid the heat wave in the West. The Philly Fed manufacturing index (Thursday) is seen dipping to 29.0 in July, extending the -0.8 point slide to 30.7 in June and the -18.7 point plunge in May to 31.5. The Empire State index (Thursday) is projected edging up to 19.0 in July. Consumer sentiment is expected to continue higher and we estimate a rise to 86.0 in the preliminary July print from the Michigan sentiment report, after edging up to 85.5 in June from 82.9 in May. A cycle high of 88.3 was posted in April.

Treasury supply is on tap too with the $120 bln in coupons for sale. These include $58 bln in 3-year notes, $38 bln in 10-year notes, and $24 bln in 30-year bonds with the latter two reopenings. The auctions could see rather mediocre results for a number of reasons. Crucially, the 3- and the 10-year offerings will be doubled up on Monday. That typically does neither auction any good. Event risk is also high with Fed Chair Powell’s testimony and data uncertainties. Additionally, the volatility of late could leave potential buyers sidelined.

The selloff last Friday helped cheapen the paper, though the slide in rates over the last several weeks, and indeed since March, leaves longer yields at some of their richest levels in months. The wi 3-year fell 3 bps to 0.145% on Friday, but that will be the highest stop since March 2020. The wi 10 and 30-year yields jumped over 6 bps higher to 1.360% and 1.990%, respectively, on Friday after richening to February lows of 1.285% and 1.857% Thursday. Despite the concession, these would be the richest since February.

Earnings season kicks off again with the banks. Headlining Tuesday are JPMorgan Chase, Pepsico, Goldman Sachs, First Republic Bank, Fastenal, and ConAgra. Wednesday has Bank of America, Wells Fargo, Citigroup, BlackRock, Infosys, PNC Financial, and Delta Airlines. Then Thursday there is UnitedHealth Group, Morgan Stanley, U.S. Bancorp,. Truist Financial, Progressive, Bank of NY Mellon, Wipro, and Cintas. The week concludes with HDFC Bank, Schwab, State Street, and Kansas City Southern on Friday.

Canada will look to the Bank of Canada’s policy announcement (Wednesday). We continue to anticipate a further cut to QE as the bank unwinds the emergency policy setting amid a recovering economy. The solid rebound in June employment, reveled last Friday, added to the already solid case for further trimming of accommodation. Hence, the BoC is expected to taper another C$1.0 bln, which would leave QE totals at C$2.0 bln. A further C$1.0 bln cut to C$1.0 bln in QE is seen around the turn of the year.

The BoC trimmed its QE program to C$3.0 bln from C$4.0 bln in April, but held it steady at the June announcement. The bank is expected to maintain its 0.25% rate setting at the July meeting and for an extended period ahead. The growth outlook in the Monetary Policy Report should remain optimistic. The CPI projections seem on course for a sizable lift, although officials will maintain the view that the spike is transitory. Broadly, the BoC has taken concrete steps to reduce emergency accommodation as the economy recovers, contrasting with a Fed that is only talking about tapering.

The economic data docket will take a backseat to the BoC this week. Manufacturing shipments (Wednesday) are projected to rise 1.0% in May after the -2.1% drop in April. Housing starts (Friday) are seen remaining firm at a 270.0k clip in June from 275.9k in May. Wholesale shipment values (Friday) are seen rising 1.1% in May after the 0.4% improvement in April. The June existing home sales release is expected Thursday.

ASIA

The pandemic remains front and center for much of Asia, with cases of the covid Delta variant rising rapidly in Japan, South Korea, Indonesia, and Malaysia. Fresh lockdowns and restrictions have been put in place in many countries in the region, which will continue to have economic implications. This week’s docket will be highlighted by data from China, including Q2 GDP June trade, industrial production, retail sales, and fixed investment. In Japan, the BoJ meets, and while no policy changes are expected in Friday’s announcement, the Bank is likely to downgrade growth forecasts, largely due to emergency pandemic restrictions in place in Tokyo and other prefectures. Inflation forecasts are set to be revised higher as well, largely due to increasing energy prices. Elsewhere, the usual mix of production, unemployment, and trade data are on tap. Other regional central bank meetings include the BoK and the RBNZ, with no changes expected, and rates steady at 0.50% and 0.25%, respectively.

China’s June trade report (Tuesday) should show the surplus narrowing to $39.0 bln from $45.5 bln previously, with some slowing in y/y exports and imports. Q2 GDP (Thursday) is penciled in at rising at a 9.0% y/y clip, half of the 18.3% in Q1. Though the massive Q1 gain came on the back of easy comparisons to Q1 of 2020 when growth slid to -9.3% on the global scourge of covid, reopenings around the world ramped have boosted Q2 exports which have helped drive growth higher. But, the data also reflect the deceleration in the activity that has become a concern to investors, as well as the PBoC which decided to ease policy last week. June retail sales (Thursday) should also show a measurable slowdown, slipping to a 9.5% y/y pace from the 25.7% in May. June fixed investment (Thursday) is forecast to have risen to a 13.5% y/y pace, down from 15.4% in May.

In Japan, the BoJ headlines. It begins its two-day policy meeting on Thursday and announces its policy decision on Friday. While no changes are expected, the Bank is likely to downgrade growth forecasts, largely due to emergency pandemic restrictions in place in Tokyo and other prefectures in Japan. Inflation forecasts are set to be revised higher as well, largely due to increasing energy prices.

Speaking of inflation, June PPI (Monday) is expected little changed at 4.8% y/y from 4.9% previously, which was the highest since 2008. Recent gains in this series have largely been driven by surging commodity prices and the impacts of bottlenecks are likely to keep prices high. May core machinery orders (Monday) are expected to rise 0.2% after the 0.6% increase in April and 3.7% bounce in March. The May tertiary industry index (Thursday) is seen at dropping -0.6% after falling -0.7% previously. Revised May industrial production is due Wednesday.

Elsewhere, India June CPI (Monday) is expected to cool to 5.5% y/y from 6.3% previously. May industrial production (Monday) should dip to a still strong 120.0% y/y rate after soaring to a record 134.4% in April. Low base effects due to the pandemic are at play here as well. June WPI (Wednesday) should remain elevated at 13.0% y/y from 12.9%. The June trade report (Thursday) should see the deficit widen to $7.0 bln from $6.3 bln in May.

South Korea BoK meets (Thursday) with no change to the 0.50% repo rate expected. It’s been held at this level since the 25 bp rate cut in May 2020. It was at a 1.25% rate in February 2020. Last week, BoK Governor Lee said the central bank is ready to raise the key interest rate “within this year,” though rising covid cases and accompanying restrictions may put any tightening move on hold for now. June unemployment (Wednesday) should dip to 3.7% from 3.8%, though rising covid cases may impact the July jobs report negatively.

Malaysia has May industrial production (Monday), expected to post a 40.0% y/y rate, slipping from the surge to a record 50.1% pace previously. Indonesia’s June trade surplus (Thursday) is estimated to have widened to $4.0 bln from $2.4 bln. Singapore’s advance Q2 GDP (Wednesday) should reveal a 1.5% y/y growth clip, versus 1.3% in Q1. June non-oil exports (Friday) are expected to rise 2.1% y/y from 0.8% previously.

In Australia, there is a light docket, but the June unemployment report (Thursday) will be of interest. We expect employment will rise 30k versus the prior 115.2k increase. The unemployment rate should dip to 5.0% from 5.1%. The RBA began tapering at its prior meeting while keeping rates at record lows. Governor Lowe indicated he wants to get policy back to normal as soon as possible so the bank can be prepared for the next downturn. He also believes the jobless rate in the low 4%s is full employment.

In New Zealand, the RBNZ meets (Wednesday). No change to the 0.25% rate setting is expected. However, the Fed’s hawkish tilt at its last meeting has rattled nerves on the outlook for the RBNZ and RBA, with worries that the banks may begin their own public discussion of tapering. On Friday, Q2 CPI is due, expected at 2.1% from 0.8% in Q1.

EUROPE

Eurozone: the ECB has revealed its new strategy and virus developments highlight that the pandemic is not over, which will leave the bank firmly on hold at the upcoming July 22 meeting. Against that background this is likely to be a quiet week as the data calendar doesn’t offer anything that could really change the outlook. Virus developments will remain in focus as the more infectious Delta variant continues to spread. The summer holidays only aid the renewed rise in cases, especially now that the U.K. has eased restrictions for U.K. travelers to most Eurozone countries.

German June HICP (Tuesday) is expected to be confirmed at 2.1%, the French reading at 1.5% y/y, the Spanish (Wednesday) at 2.6%, the Italian (Thursday) at 1.3% and the overall Eurozone reading (Friday) at 1.9%. The latter is still a tad below the ECB’s new inflation target, although as before current inflation rates are actually less decisive for the ECB’s assessment of price stability, than medium-term projections. Still, data will back the dovish camp at the ECB, which will argue for confirmation of current policy settings at the July meeting.

The Eurozone also has trade data and production numbers for May, which are unlikely to be stellar. Production is held back by capacity constraints and the nominal import bill was boosted by higher commodity prices that month.

U.K.: production and monthly GDP data for May came in weaker than expected, with GDP ebbing to a growth rate of 0.8% m/m after 2.0% m/m in April. That was about half the median forecast while the April growth rate was downwardly revised from 2.3%. The data added to the narrative that the UK’s recovery expansion, while still robust, is tempering. On the covid front, new cases are surging in the UK but the country is still headed for a full reopening on July 19, with the UK government now essentially pursuing a herd immunity policy via both vaccinations and natural infections, with vulnerable groups having largely been protected with vaccinations (the data showing that those with full double dose vaccinations are protected against the Delta variant).

The calendar this week is highlighted by June inflation data (Wednesday) and the monthly labor market report (Thursday). Headline CPI is expected to edge higher to a 2.2% y/y reading from 2.1% y/y, while core CPI is forecast to remain unchanged at 2.0% y/y. Such outcomes would be comfortably within BoE projections. The central bank is expecting prevailing price pressures, which will be much more evident in producer data, to prove to be transitory. The labor report is expected to see unemployment remaining at 4.7% in May. This is a distorted figure and will remain so until the government’s wage support scheme ends on September 30. The BoE has indicated that it is waiting to see how well the labor market fares on the other side of pandemic support measures.

Switzerland: The calendar this week is quiet, highlighted only by June PPI data (Tuesday).

Economic Data Calendar

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

The middle week of July will include the major inflation reports and July’s early producer sentiment readings, alongside an assumed further June pull-back in retail sales as we continue to unwind the April stimulus-induced peak. Business inventories likely rose in May, and we expect solid May gains for CPI, PPI and trade prices. Industrial production should rise in June, alongside a climb in capacity utilization. Sentiment reports should reveal small gyrations around solid July levels for the Empire State and Philly Fed surveys, alongside another firm Michigan sentiment reading.

Week of July 12

Through this last week’s data pause, the market has adopted a more balanced view on inflation prospects going forward, with a moderation in some commodity prices occurring alongside a pull-back in bond yields. We still assume a gradual drop-back in most y/y inflation metrics from peaks for nearly all measures in May, thanks mostly to base effects. But, we have yet to see to what degree monthly gains in prices will actually fall back to the 0.2% average needed for annual rates to get back down to the 2.5% area. The wage data have remained surprisingly firm through the pandemic, and ECI looks poised for a 2.9% y/y rise in Q1 that matches the cycle-high from the last expansion in Q4 of 2018. If inflation expectations creep upward through 2021, the drop-back in y/y inflation metrics may stabilize at higher than assumed levels.

This coming week’s data will help to gauge the degree to which economic growth will moderate into the second half of the year. An assumed further June pull-back in retail sales will highlight that the aggregate demand peak for the stimulus updraft likely occurred in April. We expect a peak in production growth through the Q2-Q3 period as depleted inventories are slowly rebuilt, with industrial production gains of 0.5% in both June and July that will get a utility lift from the west coast heat wave. Mass shortages of building materials and semiconductors will delay the rebuild in the high profile housing and vehicle sectors, and we may see a more lingering production updraft for other sectors as well. As we’ve noted, the GDP growth rates through mid-2021 will reveal the “speed limit” for capacity, and we expect similar GDP growth rates of 7.3% in Q2 and 7.0% in Q3.

CPI/Core: 0.4%/0.3%

We expect June gains of 0.4% for the CPI headline and 0.3% core, following May gains of 0.6% for the headline and 0.7% for the core. CPI gasoline prices look poised to rise 3.0% in June. As-expected June figures would result in a 4.8% headline y/y increase, following a 5.0% pace in May. Core prices should show a 3.8% y/y rise, up from 3.0% y/y in April. Widespread production bottlenecks are lifting all the broad inflation metrics in 2021, such as PPI and the trade price indexes, alongside the Q2 boost to the y/y figures from base effects that should allow peak-gains over the May-June period for the headline and core. We expect respective PCE y/y chain price gains of 3.8% and 3.3%. The Fed continues to interpret the Q2 inflation spike as transitory, though it’s unclear if upward commodity price pressure will abate in late-2021.

PPI/Core: 0.3%/0.3%

We expect a 0.3% June PPI headline rise with a 0.3% core price gain, following respective gains of 0.8% and 0.7% in May. As expected readings would result in a dip for the y/y headline PPI metric to 6.5% from 6.6% in May, though we expect a rise in the y/y core measure to 4.9% from 4.8% in April. The y/y headline PPI gain of 6.6% in May likely represented the peak for this metric, while the core y/y rate should peak at 4.9% in June. The massive PPI climb since the start of 2021 exceeded the uptrend in headline and core CPI data, though gains are chasing outsized increases in the trade price measures, alongside ongoing supply constraints that have provided a powerful lift for the inflation indexes.  

Empire State/Philly Fed Index: 19.0/29.0

The Empire State index is assumed to rise to 19.0 in July from 17.4 in June, versus a 30-month high of 26.3 in April and a 7-month low of 3.5 in January. The Philly Fed index is seen falling to 29.0 in July from 30.7 in June, versus a 48-year high of 50.2 in April and a previous 11-month high of 30.1 in January. Despite the small assumed swings, levels will likely remain robust. These diffusion indexes will be boosted into late-2021 as factory activity continues to attempt to rebuild inventories, following the huge Q1-Q2 spending boost from coronavirus vaccines and two rounds of stimulus payments. Demand for most industries has rebounded well above pre-pandemic levels.

Import/Export Price Index: 1.2%/1.2%

Import and export prices are both estimated to rise 1.2% in June, after May gains of 1.1% for imports and 2.2% for exports. Ex-petroleum import prices are expected to grow 0.6%, while ex-agriculture export prices grow 1.3%. Oil prices rose sharply into June in the face of booming global demand and tightening inventories, and prices for a wide array of commodities are being lifted by global capacity constraints and supply chain disruptions. A downtrend in the value of the dollar into 2021 also aggravated commodity price gains and the particularly big trade price increases since December. Trade price gains have contributed to the shift in market focus toward upside inflation risk as we approach 2022.

Initial Jobless Claims: 370k

Initial jobless claims are expected to fall -3k to 370k, after a 2k increase to 373k from an upwardly revised 371k cycle-low that was a 364k low in its first print. Before the mid-June back-tracking for claims, we had seen a steep rate of decline over a 6-week stretch to new cycle-lows. Claims are expected to average 362k in July, after averages of 393k in June, 428k in May, and 582k in April. The July BLS survey week reading will likely undershoot recent survey week readings of 418k in June, 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 -145k to 3,339k in the week of June 26, following an upwardly revised 3,484k figure. We expect continuing claims to fall -9k to 3,330k for the week ending July 3. 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 -150k 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.

Industrial Production: 0.5%

Industrial production is projected to rise 0.5% in June after climbing 0.8% in May. We saw May increases of 0.9% for manufacturing, and 1.2% for mining, and 0.2% for utilities. In June, we expect increases of 0.2% for manufacturing, 1.0% for mining and 2.0% for utilities. We expect the vehicle assembly rate to rise to a 10.0 mln pace in June from 9.9 mln in May, with big headwinds from ongoing semiconductor shortages. We saw a 0.1 mln trough pace in April last year, versus a 3.7 mln prior trough in January of 2009 that marked the start of the auto bankruptcies. Mining output should continue to rise, alongside the uptrend in the Baker-Hughes rig count. Capacity utilization should rise to 75.6% from 75.2% in May. Industrial production expanded at a 3.6% clip in Q1, and we expect faster growth rates of 6.3% in both Q2 and Q3.  

Retail/Ex-Auto Sales: -0.8%/UNCH

We expect a -0.8% June retail sales headline drop with a flat ex-auto figure, following respective May declines of -1.3% and -0.7%, as the March pop from stimulus checks continued to unwind. We expect a 3.0% increase for the CPI gasoline index that should lift service station sales. Unit vehicle sales fell -9.8% to an estimated inventory-constrained 15.4 mln pace from 17.0 mln in May and a 16-year high of 18.5 mln in April that extended a big jump to 18.0 mln in March. We expect a steady pull-back in retail sales into the end of Q3 as we unwind the powerful boost from Q1 stimulus, though we expect an ongoing recovery in those sectors most dramatically hit by coronavirus restrictions in Q2 of 2020. Real consumer spending is expected to grow at a 10.1% rate in Q2, after rates of 11.4% in Q1 and 2.3% in Q4.

Business Inventories: 0.6%

Business inventories are estimated to grow 0.6% in May after a 0.1% (was -0.2%) April gain. Our forecast incorporates a 0.9% rise for factory inventories, alongside a 1.3% wholesale increase and -0.8% retail drop as seen in the advance report. Sales should fall -0.1% in May, after a 0.6% rise in April. As-expected readings would result in the I/S ratio rising to 1.26 from a 9-year low of 1.25 in April, versus an all-time high of 1.72 in April of 2020. We saw an -$87.0 bln liquidation rate in Q1 that subtracted a whopping -$149.1 bln from Q1 GDP growth, and inventories should liquidate further in Q2, though at a slightly diminished rate. A $62.1 bln accumulation rate in Q4 of 2020 capped a prior 4-quarter stretch of liquidation through Q3. Inventories were already unwinding pre-COVID-19 as earlier tariff front running reversed course before the big Q2 hit, leaving room for a protracted inventory rebound through the second half of 2021.

Michigan Sentiment, Preliminary: 86.0

We expect the preliminary Michigan sentiment report to reveal a rise to 86.0 from 85.5 in June, following cycle-highs of 88.3 in April and 84.9 in March, and a 6-month low of 76.8 in February. We expect a current conditions rise to 89.0 from 88.6 in June, following cycle-highs of 97.2 in April and 93.0 in March, and a 4-month low of 86.2 in February. Expectations should rise further to an 84.0 new cycle-high from a current cycle-high of 83.5, versus a 3-month low of 70.7 in February. The 1-year inflation index is seen at 4.1% from 4.2% in June and a 13-year high of 4.6% in May that matched highs in April and March of 2011. The 5-10 year inflation measure should rise to 2.9% from 2.8% in June and a 10-year high of 3.0% in May that was last seen in 2013. Firm confidence into July is good news, though the indexes may prove slow to advance much beyond the April climb with vaccine distributions and stimulus.