Themes as the Second Half Begins
Author: Greg Valliere
July 6, 2021
WELCOME TO THE SECOND HALF: There’s no shortage of fascinating themes that will grip Washington and the markets in the second half. Here are some of the biggest ones:
1. Inflation: The bond market is acting as if the inflation threat is over, but there are warning signals on oil and wages. While prices for some commodities like lumber have come back to earth, oil seems poised to make a run at $80 per barrel as OPEC talks falter. And last Friday’s jobs report showed a 3.6% year-over-year hike in hourly earnings, which will rise further as employers desperately seek more workers.
2. All Eyes on the Fed: Every economic data point in the next few months will be viewed through the prism of the inevitable Fed tapering of asset purchases. With second quarter GDP likely to rise by 6% or better, a modestly less accommodative Fed is coming; the only issue is the timing. The Fed’s Aug 26-28 policy meeting at Jackson Hole could be crucial, preparing the markets for tapering by year-end.
3. The Covid Variant: It’s still doing enormous damage in several states where vaccinations have been lagging. There were about 10,000 fatalities last month, enough to give some people pause about returning to work, exacerbating the labor shortage. In vaccinated America, the economy is booming; in un-vaccinated America the virus has not been defeated.
4. Uncertainty in Washington: A bipartisan group of Senators has agreed to an infrastructure bill but the devil will be in the details. There’s no agreement on how — or whether — to pay for the bill; most Democrats are adamant that tax hikes should pay for even more spending. Passage of a basic infrastructure bill still seems likely by fall but a second measure, passed via budget reconciliation, will be difficult. More on this tomorrow . . .
5. Several other second half themes: Russian-sponsored hacking and ransom demands are in the news again today . . . The fall of Afghanistan, seemingly imminent as the U.S. abandons the existing government . . . The likelihood of massive fires and power outages in the drought-stricken U.S. West . . . Growing concerns about chaos in Kamala Harris’ camp . . . Dramatically more aggressive regulatory policies . . . New pressure on Stephen Breyer, 82, to step down from the Supreme Court so President Biden can nominate a younger judge.
THE BIGGEST SECOND HALF THEME for the markets obviously will be the economy, surging but not over-heating, boosted by remarkably low interest rates, plus even more fiscal stimulus and a Federal Reserve that’s not ready to raise rates for at least another year. There’s plenty to worry about, but fundamentals still look good.
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