- Operation Warp Speed and the continued efforts under the new administration pushed US vaccine distribution to over 55% of the total population given at least one dose with the EU just behind at 53% with China claiming 48% and India 22%. While the Delta variant gets many breathless headlines, the graphs of the UK below demonstrate the dramatically better outcomes of those that become ill (the UK case count is about 99% Delta variant per CBS News):
Simply put, the official seven-day moving average daily case count moved to about 15,000 during June, but deaths stayed almost zero, a break from the previous pattern of parallel movement.
- US vaccination rates declined in parallel with the case, hospitalization and death rates. The most recent data in late June from the CDC was 13,859 COVID daily cases with less than 200 deaths (by comparison, in mid-January, the peak seven-day average case count was 250,000 and attributed death was 3,600). Our thoughts and prayers go out to those taken ill and we hope that they have access to proper care and recover fully.
- Still Projecting a Strong Q2 GDP Growth (+7.8% annualized), the Atlanta Fed pared back its originally very strong forecast on lower positive estimates of consumer behavior. Still, industrial production rose +0.8% m/m in May, beating consensus of +0.6% m/m and following a downward revision to +0.1% m/m for April. Mining, the majority of which can be attributed to oil and gas, grew +1.2% m/m while manufacturing increased+0.9% m/m. Factory good orders also increased in May by +1.7%. US retail sales fell -1.3% m/m in May although April was revised up to +0.9%. The pace of hiring accelerated in June, with payrolls gaining the most in 10 months, as nonfarm payrolls increased by 850,000. Unemployment increased slightly to 5.9% as job-seekers increased. Wages of non-supervisory workers showed a supportive +0.3% m/m increase in average hourly earnings. The gain in payrolls, while well above expectations, doesn’t markedly raise pressure on the Federal Reserve to pare monetary policy support for the economy as payrolls are still 6.76 million below their pre-pandemic level. On the other hand, inflation (CPI) jumped +0.6% m/m or +5.0% y/y, the largest twelve-month gain since August 2008. Core CPI (ex-food and energy), moved up +3.8% y/y, the most since 1992 for a year period. The Fed explained this away by saying this is transitory – perhaps they were looking at the graphic to the right which implied that the move is more catch-up / variation around the recent average increases in price level. We shall see.
- Inflation Made Headlines But Fed Not Worried as Fed Chair Powell told the House of Representatives “We will not raise interest rates pre-emptively because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances.” In short, the Fed argued that inflation will be transitory due to deflationary pressures last year at the beginning of the pandemic-induced shutdowns. At the June FOMC meeting, there were no changes to the Fed funds target rate, pace of asset purchases or forward guidance. However, of the eighteen policymakers, thirteen expect at least one 25 basis point rate rise by the end of 2023, up from seven in March – and even two are possible. Given that front rates are effectively zero, this would be a tiny move (apart from levered speculators, of course). Powell also confirmed that the Fed is talking about talking about when to start tapering so this says to me that such moves would still be a 2022 event.
- Biden Budget Proposal Continued the Spending Spree with the expected deficit to exceed $1.8 trillion, assuming his two additional spending plans pass the Senate. However, even if they do not, next year’s deficit will be different only by about $100 billion – a rounding error these days. While Democrats can force some of the additional spending through, Senate rules limit their ability. July may see clarity although there are a lot of moving parts. Certainly the US is not the only culprit here as global debt continues to increase (see graph).
- China’s Factory Output, Retail Sales and Investment Missed expectations in May. Industrial production grew +8.8% in May from a year ago, slower than the +9.8% in April. Retail sales rose +12.4% y/y, weaker than +13.6% growth expected by analysts and the +17.7% jump seen in April. Fixed asset investment increased +15.4% in the first five months of 2021 versus a forecast +16.9% rise. China began releasing national reserves of major industrial metals in an effort to rein in surging commodities prices fueled by a resumption of global economic activity, including copper, aluminum and zinc. Authorities also ordered state firms to curb their overseas commodities exposure, forced domestic banks to hold more foreign currencies, considered a cap on thermal coal prices, censored searches for crypto exchanges and effectively banned brokers from publishing bullish equity-index targets. Finally, a new rule will bar cash management products from holding riskier securities and limit their use of leverage. PRC Macro consultancy discussed the slowdown in excavator sales in China as a sign of a cyclical peak in housing starts. This was in addition to weaker land sales in third and lower-tier cities which would indicate a slowing economy (or at least slowing local stimulus). At least the backlog at ports such as Yantian started to clear up which would ease shipping costs and improve trade.
- Japanese Exports Continued Higher, hitting +49.6% year over year as shipments of cars and auto parts more than doubled despite the shortage of semi-conductor chips. Deliveries to the US gained +87.9%, while those to the EU climbed +69.6%. Both records in comparable data going back to 1980. Exports to China, a market that was already recovered, climbed +23.6%. However, unavailability of semiconductors stifled Japan’s industrial production, lowering it by -5.9% in May from April, but was still up +22.0% from a year earlier. Taiwan’s exports continued to grow in June as exporters kept their factories running despite COVID restrictions. Exports rose 35.1% last month from a year earlier to $36.7 billion, the second-highest amount on record.
- Eurozone Statistics Continued Improvement as the area reopened but the ECB decided to accelerate their bond-buying and aim for higher inflation. First the numbers: industrial production rose +0.8% in April m/m (a strong move) but Germany posted a negative result for May (-0.3% versus +0.5% expected), foreshadowing disappointing results for the region. The Ifo Institute predicted German economy would grow by a weaker-than-expected +3.3% this year as supply bottlenecks in manufacturing hold back industrial output, a cut of -0.4%. The euro area’s seasonally adjusted unemployment rate improved to 7.9% in May, compared with 8.1% in April and 7.5% in the year-ago period. Also supportive, May retail sales came in strong at +4.6% m/m against estimates of +4.3%. To head off slower economic growth, the ECB decided to it maintain the increased pace of buying under the €1.85 trillion ($2.24 trillion) Pandemic Emergency Purchase Program (PEPP) at €19 billion a week, up from €14 billion a week at the start of the year. The ECB also decided to allow for excess inflation of over 2% before raising rates, similar to the Fed’s policy of letting the economy “run hot.” We shall see how successful this fiscal repression policy plays with the everyday person. Perhaps the most telling economic indicator was the news that US clothing retailer Gap said it will shutter all of its stores in the UK while offloading brick-and-mortar operations in France as part of a broad review of its European business.
David Burkart, CFA
Coloma Capital Futures®, LLC
Special contributor to aiSource