U.S. and World News
Retail sales rose 0.7% in August, rebounding from a drop in July. The 70 basis point increase was driven by schools, college campuses and offices reopening, and consumers spending more for groceries and merchandise at big-box stores. Meanwhile, initial jobless claims rose 20,000 last week to 332,000 but remained near a pandemic low. Layoffs caused by Hurricane Ida, which hit Louisiana in late August, likely contributed to the increase. As cases of vaccinated citizens increases, new masks mandates implemented by the government, and capacity restrictions in public places have a direct impact in certain areas such as restaurants, who reported flat revenue last month. Moreover, Americans in recent weeks have cut spending on travel, and multiple artists have canceled concerts. Such spending isn’t captured in retail sales statistics, which mostly covers goods such as cellphones, televisions, groceries and back-to-school goods.- Early this week the President Joe Biden proposed a set of tax increases and enforcements that could offset up to $3.5T in spending that is currently being proposed by House Democrats. This proposal includes an in tax rate to 26.5% from 21.0% 5.5% for corporations as well as raising the top individual rate to 39.6%. Meanwhile, the top capital gain tax rate would be raised by 5% to 25% from 20%, and a 3% surtax on people making over $5M have been proposed. With the proposed offsets to spending on the table, the debate on the Democrat proposal can now begin in earnest.
Markets
- Markets were down this week. The S&P 500 decreased by -0.54% and closed at 4,432.99. Meanwhile, the Dow Jones was down by -0.04% and closed at 34,584.88. Year-to-date, the S&P 500 is up 19.24% and the Dow Jones is up 14.57%.
- Yields moved very little this week. The 5 year and 10 year U.S. Treasury Notes are yielding 0.86% and 1.37%, respectively.
- The spot price of WTI Crude increased this week. Prices increased +2.11% and closed at $71.94 per barrel. Year to date, Oil prices are up +48.26%.
- The spot price of Gold decreased by -2.27% and closed at $1,752.83 per ounce. Year to date, Gold prices are down –7.70%.
Economic Data
- Initial claims 332,000 for the week ended September 11, prior revised 312,000
- CPI rose +0.3% month over month for August, median forecast +0.4%, prior +0.5%
- Core CPI increased month over month +0.1% for August, median forecast +0.3%, prior +0.3%
- CPI year over year rose +5.3% for August, median forecast +5.3%, prior +5.4%
- Import prices decreased -0.3% month over month for August, +9.0% year over year vs. median forecast +0.2%, prior revised +0.4%
- Import prices ex-petroleum -0.1% month over month for August, up +5.9% year over year vs. median forecast +0.2%, prior revised +0.3%
- Empire manufacturing index +34.3 for September vs. median forecast +17.9, prior +18.3
- Industrial production +0.4% for August, median forecast +0.5%, prior revised +0.8%
Fact of the Week
3.2 million Americans retired in 2020, a +56% increase over the average 2.05 million Americans who retired over the previous 8 years, i.e., 2012-2019 (source: Pew Research Center).
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President Biden announced a new plan to curb the spread of the Delta Covid variant. All employers with 100 or more employees would have to require that their workers be vaccinated or undergo at least weekly Covid-19 testing. The administration said Thursday that businesses that don’t comply can face fines of up to $14,000. As expected, private companies as well as Republican-led states are stepping up to fight against the new mandate. So far, Montana is the only state that has banned private employers from requiring their workers to get the Covid-19 vaccine, according to research by the National Academy for State Health Policy. Companies including United Airlines and Tyson are requiring all employees to be vaccinated. Others, such as Walmart, McDonald’s. and Walt Disney, have said certain groups, such as managers, need to take the shot. However, for federal employees there is no such flexibility regarding the vaccine. President Biden also announced that federal workers and contractors who work on-site must be vaccinated, without the option to be unvaccinated and tested on a weekly basis.
Major metropolitan areas across the United States have felt the brunt of the impact from Hurricane Ida. In New Orleans, in the midst of a stifling Louisiana summer, millions of residents are still without power or running water. It is estimated that these outages could last for up to a month. Meanwhile, the storm cell moved up to the Northeastern United States, causing massive flooding in the New York City and Philadelphia areas. It is estimated that as many as 45 people have been killed as a result of the flooding. The economic impacts of Ida are yet to be seen, but the oil refineries that were caught in the storm’s path expect that it may take weeks to restore operations, depending on how long it takes to bring power online. So far, the average U.S. price for a gallon of gas has risen by less than a cent, but gasoline futures rose by as much as 1.6% on Monday.
Jerome Powell also spoke about inflation, which rose 3.6% in July, compared to one year ago. Mr. Powell remains confident that this inflation is in fact transitory and that responding may do more harm than good, particularly in an era where interest rates are near zero. Powell said that monetary policy decisions taken by the Federal Reserve can take up to a year, thus making decisions based on temporary factors can slow down the economy. In his review of recent inflation developments, Mr. Powell suggested inflation was likely to moderate in the coming months because prices of certain items, such as used cars, that contributed strongly to the recent price surges have begun to decline.
The world’s third-largest port, Ningbo-Zhoushan in China, remained shut this week after operations were suspended last week in response to a single Covid-19 case. The suspension of activity has put pressure on other ports like Shanghai and Hong Kong. Goods for companies attempting to transport products are expected to experience delays of up to two weeks. Supply chains have experienced significant disruptions because of Covid-19. In fact, it is estimated that about 10% of global container capacity is stuck on ships in congested ports ranging from Los Angeles, CA to the Netherlands. Beyond that, the daily freight rate for goods sailing from China to the US have more than tripled since the start of the year. Industry experts do not expect a return to normal operations until early next year.
This week Senate voted overwhelmingly to approve a $1 trillion infrastructure package, with nearly 70 Senators voting in favor, an uncommonly bipartisan vote. The bill’s aim is to rebuild the nation’s deteriorating roads and bridges as wells as fund new climate and broadband internet initiatives. The package now moves on to the House where it faces a much more difficult route to passage. Democratic House leaders have said they will not vote on the infrastructure plan until the Senate passes a separate $3.5 trillion social policy bill which includes spending on health care, child care and education.
In recent weeks, the Chinese government has moved to reign in some of their largest companies. They have launched probes into ride-sharing app Didi, blocked IPOs, and fined their companies for billions of dollars. Most recently, China’s antitrust regulators have announced intent to fine food-delivery company Meituan $1 billion for allegedly abusing its position in the market to stifle competition. Such behavior indicates a future in which regulation and governance can be unpredictable and heavy-handed. The government’s willingness and ability to assert itself from a regulatory standpoint has worried foreign investors and reflects an overall realignment of the relationship between private businesses and the state in China.
The U.S. debt ceiling of $22 trillion, which represents the total amount lawmakers permit the government to borrow and has been on hold for two year, will be reinstated on Sunday. The Treasury will begin its extraordinary measures to avoid breaching the limit by suspending sales of securities that helps states and municipalities invest bond proceeds. With no action from Congress imminent toward raising the debt ceiling, measures such as these will likely continue until September when it is projected that the debt ceiling will be breached despite the measures. Democrats can suspend or increase the limit by a process called budget reconciliation, which requires no Republican votes. Other possibilities would include creating a standalone bill or negotiating with Republicans on other budget items in exchange for a raise of the ceiling After Monday, Treasury has several additional options to avoid a default such as suspending new investments in several government program funds. Since 1985, the Treasury has used such measure more than 12 times and in every instance was able to avoid a government default. However, the contentious debt ceiling debate of 2011 did result in the U.S. receiving its first debt downgrade from S&P.
The Biden administration publicly blamed hackers affiliated with the Chinese government for an expansive cyberattack on Microsoft and thousands of its customers. The attack, which occurred in March, is yet another example in a growing list of cyberattacks levied against United States companies. The administration did not levy any sanctions on the Chinese government in response to the findings. This comes in contrast to the sanction levied against Russia for the SolarWinds hack and other malicious acts. Senior administration officials have said that their actions against China are intended to garner international support against this kind of behavior from Beijing. According to Microsoft’s vice president of customer security and trust, “Attributions like these will help the international community ensure those behind indiscriminate attacks are held accountable.”
During this week’s Congressional testimony, Federal Reserve Chairman Jerome Powell said recent inflation in the United States was above the levels that the Central Bank seeks, driving the confidence of the economic outlook down. Mr. Powell claimed the reason for such inflation is driven by supply constraints for a small group of goods and services that have led to rapid price increases. Powell said that the Fed does not want to overreact to a onetime increase in prices of certain goods and services such as air travel, hotel rates, and the automobiles. Although still considered transitory inflation by Jerome Powell, they are following the situation closely to make sure it doesn’t continue increasing the rest of the year. U.S consumer prices continued to accelerate in June at the fastest pace in 13 years.. Mr. Powell indicated the Fed was in no hurry to adjust its policies at the moment, but that it would have a better understanding of how the reopening was proceeding by year’s end. The Fed is also paying close attention to the jobs report as they hope the number of people looking for jobs this month increases to be able to satisfy demand in different industries where they are lacking workers. Many economists believe tighter labor markets would prompt the Fed to raise rates sooner, although the Fed insists that this elevated inflation is driven by the new trends in the workforce participation.