by Bryan Perry

September 14, 2021

The U.S. economy may well be in the midst of a soft patch, due to a very stubborn COVID-19 virus and some persistent inflation brought on by the ongoing global supply chain disruptions.

Friday’s Producer Price Index (PPI) reading put a spotlight on the bottlenecks that many producers are contending with to manage profit margins. The PPI for final demand increased 0.7% month-over-month in August after increasing 1.0% in July. On a year-over-year basis, the Producer Price Index was up 8.3% versus 7.8% in July. The index for processed goods for intermediate demand rose 1.0% in August and was up 23.0% year-over-year, its highest increase since February 1975. (Source: briefing.com)

Producer Price Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

For the second time in the past four weeks, Goldman Sachs has lowered its U.S. GDP forecast for 2021, from 6.2% down to 5.7%. For the third quarter, Goldman slashed its growth forecast from 9.0% to 5.5% due to the impact of the COVID Delta variant, but it also raised its outlook for the fourth quarter from 5.5% to 6.5%, citing expectations of virus fears diminishing and some supply shortages being rectified.

Goldman’s lowered growth outlook was issued just as investors were coming off a long Labor Day break, triggering a four-day bout of selling that saw the S&P give back 1.7% and the tech-rich Nasdaq retreat 1.9%. The selling pressure was not offset by rotation into the Treasury market, as is usually the case.

Instead, $120 billion in new 3-, 10- and 30-year debt saw strong demand, so the 10-year yield rose to 1.34% in anticipation of today’s Consumer Price Index (CPI) release for August, where a survey of economists anticipates an increase of 0.5% (a 6% annual rate).

Ten-Year Treasury Note Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Some of Friday’s late selling pressure could also have been attributed to the 20-year anniversary of 9-11 over the weekend, but the week had already taken on a tone of distribution, especially in the home-building stocks, where supply chain disruptions have analysts lowering projections. There was really nowhere to hide as all 11 sectors closed down for the week, making the biggest drop since February.

Weekly Sector Performance Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Aside from the Delta variant, the supply chain, and wage inflation, it’s my view that market participants are most concerned about what the Fed’s policy plan is. From the Beige Book, released September 8, we can see some key takeaways that suggest Jerome Powell will continue to maintain a wait-and-see posture.

Here are a few transcripts from the Beige Book that seem to provide a few tea leaves for investors.

OVERALL ECONOMIC ACTIVITY.

Economic growth downshifted slightly to a moderate pace in early July through August. The deceleration in economic activity was largely attributable to a pullback in dining out, travel, and tourism in most Districts, reflecting safety concerns due to the rise of the Delta variant, and, in a few cases, international travel restrictions. The other sectors of the economy, where growth slowed or activity declined, were those constrained by supply disruptions and labor shortages, as opposed to softening demand.

Looking ahead, businesses in most Districts remained optimistic about near-term prospects, though there continued to be widespread concern about ongoing supply disruptions and resource shortages.

EMPLOYMENT AND WAGES

Demand for workers continued to strengthen, but all Districts noted extensive labor shortages that were constraining employment and, in many cases, impeding business activity. Some Districts noted that return-to-work schedules were pushed back due to the increase in the Delta variant. With persistent and extensive labor shortages, a number of Districts reported an acceleration in wages, and most characterized wage growth as strong — including all of the midwestern and western regions. Several Districts noted particularly brisk wage gains among lower-wage workers. Employers were reported to be using more frequent raises, bonuses, training, and flexible work arrangements to attract and retain workers.

PRICES

Inflation was reported to be steady, at an elevated pace, as half of the Districts characterized the pace of price increases as strong, while half described it as moderate. With pervasive resource shortages, input price pressures continued to be widespread. Even at greatly increased prices, many businesses reported having trouble sourcing key inputs. Some Districts reported that businesses are finding it easier to pass along more cost increases through higher prices. Several Districts indicated that businesses anticipate significant hikes in their selling prices in the months ahead.

These notes are, in my view, not the stuff of a Fed ready to pull the punch bowl away when there is no positive data suggesting the Delta variant is withering away, supply chains are returning to normal or the dislocation in the job market is getting worked out. As long as these conditions persist, it’s going to drive prices higher and negatively impact consumer spending in the rest of September and the fourth quarter.

Additionally, Congress remains in a stalemate about getting the $1 trillion infrastructure package passed anytime soon. The infrastructure legislation faces an uphill path in the House, where Nancy Pelosi has repeatedly said that she will not take it up until the Senate clears the $3.5 trillion reconciliation bill.

Again, I don’t see Powell’s Fed embracing any talk of tapering when Congressional pandemic stimulus has effectively run out, federal unemployment checks have expired, and Congress can’t reach a deal.

Until these collective headwinds are addressed and satisfied, the chances appear remote the Fed will add more uncertainty to the mix. Therefore, this current pullback the market is undergoing will likely result in a relief rally when the FOMC statement is released on September 22. But investors should be prepared for another 2%-3% downside leading up to this next Fed gathering, providing the 5% correction that has been the talk of Wall Street for the past week. If so, it will arguably be the best buying opportunity of the year.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
This Could Be “The Big One”

Sector Spotlight by Jason Bodner
Why 9/11 is Personal to Me

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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