Bulls and bears in tug of war as uncertainties loom

Thoughts

• Equity markets continue to muddle along, with investors confused about the direction of the next move. The fundamental picture is strong, but there are worries about peak economic and earnings growth. Worries about disruption from the Delta variant and a global slowdown are increasing, but the alternatives to the equity market remain limited, with the 10-year Treasury yield below 1.30%. Investors continue to lean towards a buy-the-dip mentality, however, with $12 billion of inflows into equities in the most recent week. This is supported by a surge in repurchase activity, with $680 billion through July the second highest level since 2000. Crypto is benefitting from this activity, with Bitcoin above $50,000 for the first time since May.
• Equity markets are in a historically weak seasonal period, as investor interest and news flow typically wane in late summer and early fall. While equity markets remain near record highs, two notable trends are worth watching to detect an inflection. First, while markets were only fractionally lower last week, volatility was elevated, with the VIX touching the highest level since May before fading by week’s end. Second, there has been modest deterioration in credit spreads, with the ICE Bank of America High Yield Index touching the widest spread since March.
• Bulls and bears have entered a tug-of-war, with seasonal factors and growth concerns likely to weigh on markets in the near term.

News

• Economic data are showing elements of peak growth, with a 7.0% drop in housing starts, the lowest level since April. This was echoed by a report on NAHB builder confidence that fell to a 13-month low, driven by falling traffic as buyers experienced sticker shock from higher construction costs. Retail sales fell 1.1% in July, led by autos and parts, despite continued government stimulus checks. The Citi U.S. Economic Surprise Index is at the worst level since last June, and the G-10 reading is at the weakest level since before the pandemic. This sluggishness could be exacerbated by the benefits cliff that could see 7 million Americans lose unemployment aid after Labor Day, with additional funding from Congress unlikely given the timing.
• The FDA could grant full approval of Pfizer’s vaccine as early as Monday, potentially putting some at ease compared with the previous Emergency Use Authorization. This would be two weeks earlier than targeted and could pave the way for more organizations to impose mandates. The Delta variant has already reaccelerated vaccine rates, with one million shots administered Thursday for the first time since early July, with the current rate 70% higher than a month ago. Concerns around the vaccine are arising, however, given the surge in cases in Israel despite mass vaccinations and studies in the U.K. showing deteriorating protection through time.
• News around fiscal and monetary policy has stalled as the Fed convenes its virtual Jackson Hole Summit. There had been much speculation that Chair Powell would use his Friday speech to detail the plan for tapering, but consensus now sees that discussion at the September FOMC meeting. There is little evidence of a taper tantrum, as the 10-year Treasury yield is roughly 0.50% below the March peak. House Democrats remain at an impasse on the $3.5 trillion budget resolution framework, with centrists insisting that the $1 trillion bipartisan infrastructure bill goes first, while progressives refuse to act unless the budget resolution passes the Senate.

What to Watch

• Economic data this week include PMI and existing home sales on Monday, new home sales Tuesday, durable goods on Wednesday, revised GDP on Thursday, and GDP deflator, personal income and spending, and consumer sentiment on Friday.