Markets Welcome Tamer Inflation, Bipartisan Infrastructure Bill

Markets breathed a mild sigh of relief amid a generally positive week of developments. Consumer prices, one of the most closely watched metrics over the past several months, rose at a more modest rate than expected, which helped cool some fears about the Fed acting soon to tamp out inflation.  

The Senate, in bipartisan fashion, passed a $1.2 trillion infrastructure package. The potential flood of funding stands to further benefit cyclical sectors of the economy, which were already experiencing potent demand tailwinds. While the bill now heads to the House, smart infrastructure spending could create jobs and boost U.S. productivity in the years ahead (which can also help keep price increases moderate over a longer period). Of course, attention will likely shift to how it’s all paid for, in addition to the $3.5 trillion budget framework that’s also up for debate and could be linked with passage of the infrastructure bill.

Still, concerns about the trajectory of COVID-19 here and abroad, hiring difficulties and supply bottlenecks are sticking around for now. Here’s a look at the week that was and the week ahead.

WALL STREET WRAP

Inflation Loses Some Steam: While prices rose again in July, the pace notably decelerated from the month prior, and that was a welcome report last week in a market increasingly concerned about rising prices. The Labor Department reported Wednesday that its consumer price index rose 5.4 percent in July from a year earlier and 0.5 percent month-over-month. Core inflation, which removes more volatile food and energy components, rose 4.3 percent year-over-year, down from 4.5 percent the month prior. Month-over-month inflation rose to just 0.3 percent in July compared to 0.9 percent in June.

Used car and truck prices, an outsize contributor to headline inflation over the past two months, moderated significantly in July, rising just 0.2 percent compared to June’s 10.5 percent jump. Fed Chairman Jerome Powell has said throughout the summer that he views the current bout with inflation as transitory, and it shouldn’t compel the Fed to significantly alter policy before the labor market fully heals.

Producer Prices Rise: The producer price index, which measures prices producers receive for their output, rose 7.8 percent year-over-year in July, the fastest annual pace on record. Month-over-month, price increases in July matched June’s tally of 1 percent.

A rise in COVID-19 restrictions in Asia could put further pressure on prices. Several countries have reimplemented some restrictions, including temporary factory closures in Thailand, Malaysia and Vietnam. Congestion has risen in China's top two container ports following the shutdown of a terminal after a COVID-19 case was detected last week, for example. All of this could add another wrench into already gummed-up international supply chains.

Job Openings Hit a Record: The number of job openings in the U.S. reached 10.1 million, the U.S. Bureau of Labor Statistics reported Monday. That’s a record for the data series and outnumbers the total unemployed population by well over 1 million.

Employers, particularly in the hardest-hit services sector of the economy, are having difficulties filling open jobs amid a flood of demand for travel, dining and entertainment. Enhanced unemployment benefits (which are set to expire next month), health concerns, childcare and the types of jobs available are all contributing factors. As a result, many employers are sweetening their offers by raising wages, offering sign-on bonuses and flexible working conditions to fill positions.

Hiring Challenges Persist on Main Street: Small business optimism fell 2.8 points in July to 99.7, according to results from the NFIB Small Business Optimism Index. Two factors that have challenged owners, supply chain disruptions and finding qualified workers, are sticking around. Forty-nine percent of owners said they have openings that cannot be filled, which is a 48-year record for the index. A net 12 percent of owners say current inventory levels were “too low” in July, which is also a 48-year record high reading. All together, that’s put downward pressure on small business owners’ optimism for conditions going forward.

“Ultimately, owners could sell more if they could acquire more supplies and inventories from their supply chains,” said NFIB Chief Economist Bill Dunkelberg.

THE WEEK AHEAD:

Services Spending on the Rise? July retail sales, due Tuesday, should show a continued shift in consumer spend from goods to services. Consumers are still sitting on healthy savings, which is fueling demand. However, we’ll see if rising prices, issues with inventories and the COVID-19 resurgence are impacting the things we buy.

Corporate Earnings Roundup: The Q2 corporate earnings season largely draws to a close this week, and we’ll pull together some final takeaways from an all-around strong raft of earnings reports. NM’s investment team will pull together a few callouts and look ahead to the next quarter.

Housing, Industrial Production and More: We’ll also get another raft of housing data this week, from builder sentiment to housing starts. Industrial production, capacity utilization and business inventories will also be worth a look this week, as they are both indicators of future growth.

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