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Home>Daily Capital>Investing & Markets>Markets: Infrastructure Inundation > Inflation Indigestion

Markets: Infrastructure Inundation > Inflation Indigestion

Capital Markets Perspective brings you what to watch in the markets this week, published in partnership with Great-West Investments.

Here’s What We Learned Last Week

Week in Review: August 9-15

On Tuesday, the U.S. Senate passed a “slimmed-down” (but still $550b) infrastructure bill on a vote of 69 to 30, meaning that 19 Republicans sided with Senate Democrats to push forward what is now being called “the INVEST in America Act,” a sort-of-bi-partisan resolution that originated in the House of Representatives a few months ago and would spend significant sums on things like roads, bridges and airports. Then, following a late-night “vote-o-rama” (no kidding, that’s really what it’s called!) that same day, Senators passed a continuing resolution covering the remainder President Biden’s $3.5t infrastructure agenda. This time, the 50 Democratic Senators had to go it alone.

You could almost hear hedge fund managers and reddit traders alike shouting “show me the money!”, Jerry Maguire-style.

It wasn’t so much that the $550b INVEST In America bill passed the Senate – that was pretty much the base case for investors and policy wonks, too – but probably more because the Senate also moved forward with the second track of the “two-track plan” (…that’s the part that allows the House to also consider the President’s ambitious $3.5t plan alongside the bipartisan one.) That matters, because Speaker Nancy Pelosi said she wouldn’t allow her chamber to consider the Senate-approved $550b plan unless the Senate also sent her the more aggressive $3.5t add-on at the same time.

While the big $3.5t deal may face significant opposition when its time comes, the Senate’s willingness to provide progressives in the House with just enough red meat to keep them satisfied probably makes the smaller $550b package a little more likely to pass. Bottom line? There could be a whole lot more government-directed cash flooding into the economy soon, whether in the form of a $550b INVEST in America Plan, Joe Biden’s $3.5t “human infrastructure” program, or both. And the cash would probably start flowing at about the same time as the last of the pandemic-era stimulus fades away in earnest.

It’s tempting to assume that the prospect of an incoming infrastructure bonanza is what allowed equity markets to float higher last week (with two of the indices we track here – the Dow Industrials and the S&P 500 Index – setting all-time record highs on Friday,) but we all know markets don’t really think like that (if they really “think” at all…) But its nonetheless noteworthy that both of these more cyclically-oriented benchmarks reached new all-time highs during a week when inflation – one of the market’s other big boogeyman behind Washington policy these days – also hit a personal record.

To wit: headline CPI rose 0.5% and is running at an annual rate of 5.4%, while producer prices are annualizing at an even more eye-watering 7.8%. Producer prices were a bit higher than expected, but CPI was more or less in line, and even the elevated PPI data probably didn’t catch too many people off guard since the inflation debate has been front-and-center for the better part of a year now. Regardless, it’s still a little unsettling that price pressures have remained so relentless, even as the dreaded “base effects” should be starting to fade away by now. All the justifying comments about used cars and travel-related re-opening demand aside, I think we would all feel a little better about where markets are at if prices cooled off at least a little bit.

But we might have to wait a little longer still for that to happen. One of the key reasons inflation has been running so hot lately has to do with COVID-snarled supply chains – something that the inflation-appeasers say will resolve itself soon. They may be right, but last week represented something of a setback for that argument after China’s third largest container port had to shut down one of its largest terminals due to COVID. According to one report, the closure occurred after a single, asymptomatic case of the virus at the port. That highlighted to some exactly how decisive (and aggressive) Chinese officials can be in their efforts to control the virus, allowing imaginations to run wild about the potential for other, equally dramatic responses by Beijing if COVID cases continue to surge. If that comes to pass, future shutdowns could be unfortunately timed to coincide with the manufacturing- and shipping industries’ pre-holiday peaks. (Little wonder, then, that business inflation expectations renewed June’s all-time high when the Atlanta Fed released its results last Wednesday. A full 62% of respondents said they have faced supplier delays as a result of supply chain stress, and more than half of those classified the resulting disruption as “moderate” or “severe.”)

While we’re on the subject of expectations, news wasn’t exactly great there, either. The fun started on Monday with the release of the NFIB’s small business confidence index which, while still elevated, dipped pretty significantly as small business owners began to lose some of their faith in the ability of the economy to keep growing at its current torrid pace. A record number of firms (49%) say they have jobs available that they simply can’t fill, even though a near-record 38% of them have increased wages recently. That, plus a litany of other concerns, is enough to make small business owners increasingly skeptical about not only the overall economy’s ability to continue to grow, but also about their own ability to increase future sales and earnings. Hmmm…

And then there was this: the University of Michigan’s preliminary read of consumer sentiment was nothing short of awful. The index’s 11-point drop ranked as the seventh-largest decline in the five-decade history of the index, and the top six were all related to “sudden negative changes in the economy” such as the COVID-related shutdown in April, 2020 and the nadir of 2008’s “Great Recession.” That made last week’s collapse in consumer sentiment noteworthy because it didn’t really coincide with anything beyond anxiety related to the Delta variant. For what it’s worth, that was actually viewed as a reason for optimism among the survey-taking professors, who suggested that “dashed hopes” about the ability of the economy to deal with delta, together with simple disease fatigue, caused consumers to react emotionally. If and when the Delta situation is brought under control, they expect a shift toward “outright optimism.”

Let’s hope they’re right and that all of us exhausted consumers are just crying wolf.

What to Watch This Week

August 16-22

Monday: Empire State Manufracturing

Tuesday: Retail sales, NAHB Homebuider sentiment, WMT earnings

Wednesday: Housing starts/permits, Fed minutes

Thursday: Weekly jobless claims, Philly Fed, leading economic indicators

Friday: No significant releases expected

Other Fed-related information on tap this week includes the minutes from the FOMC’s meeting on July 27-28. You might recall that one of the more interesting topics discussed by Fed Chair Powell after that meeting was the Delta variant and the Fed’s relatively optimistic view that it would likely follow the same path as other COVID surges – that is, a dwindling economic response to each subsequent surge in cases. Any color around that discussion – as well as any talk about the timing and details of a tapering of asset purchases at some point in the future – will likely occupy the market’s attention if detailed in this week’s release of the minutes.This week will feature the first two regional Feds, Empire State on Monday and the Philly Fed on Thursday. The regional Feds are often viewed as complementary to other forward-looking data like purchasing manager indices, and, like those reports, have consistently suggested that US economic growth is currently very robust. Also like the PMIs, though, they’ve recently shown signs of peaking. If that eventually proves to be the case, fears that we may have already seen the fastest growth of this cycle may move to the fore. Watch Empire State and Philly for any suggestions that this might be the case.

It’s also the first week of the two-week parade of housing-related data that we get each month. This week’s installment focuses largely on the supply side of the equation, with NAHB builder sentiment on Tuesday and the housing starts and permits release on Wednesday. As you almost certainly know, a very large component of the recent run-up in housing prices has been a relative lack of supply; both of these releases should help shed light on whether any more relief on that front is forthcoming. But for information about the status of that boom, the following week’s multiple reads on home prices and transaction volumes will be at least as important for the view they will provide into demand. While it has yet to show up conclusively in the numbers, it certainly seems as if some of the steam has vented from the housing boom in recent months. Stay tuned for more this week and next.

For the best read into whether last week’s big miss in the UofM’s consumer sentiment report translated into any shift in purchasing patterns, Tuesday is the day you’ll want to tune in. First, we’ll get a chance to see the 30,000-foot view when the Census Bureau releases its first look at July retail sales. Then, for an in-the-trenches view, massive retailer Wal-Mart is expected to release quarterly earnings before Tuesday’s open. Corporate earnings reports and the post-release conference calls are almost always more insightful and interesting than data released at the macro level, so if you have to choose one or the other, pick Wal-Mart. (Come to think of it, given that last year Wal-Mart’s total US revenue year represented just shy of half of what the DOC classified as general merchandise store sales during the corresponding 12 month period, maybe we should just dispense with the formalities and let Wal-Mart executives take over that report themselves. Could save a little cash to help pay for all those roads and bridges. I think I’ll write my congressman…)

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The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

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Thomas Nun, CFA, is a portfolio strategist for Great-West Investments.
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