Something of a bumpy week with a number of crosscurrents. A Fed meeting, corporate earnings reports, and another clamp down by the Chinese authorities on some private firms all grabbed investor’s attention. Some of the highlights:
Growth Moderates – Supply Concerns Weigh
The first estimate for second quarter GDP growth was released this week. This initial number came in at +6.5%, 1.9% below estimates (chart below).
The two main stories are 1) consumers continue to spend at a solid clip, and 2) inventories and construction activity weighed on growth, largely due to supply problems. The decline in inventory levels all by itself cut -1.1% off the GDP number (chart below). This is probably temporary – eventually, inventories will need to be restocked, and when that happens, topline GDP growth will increase.
The Fed Wants to Taper and Want’s Everyone to Know it
The Fed meeting was more of the same. Basically:
– Like everyone they are worried about the increase in COVID cases but they don’t think it will undermine the recovery.
– They think the recent increase in inflation won’t last.
– They want to reduce the size of their assets purchases if everything goes as planned.
– They aren’t sure when they will start tapering, but are currently thinking around year-end.
Goldman’s timeline below seems like a pretty good estimate of how things might play out in the coming months.
Needless to say, nothing is going to happen quickly.
Inflation and Bond Yields
More inflation data on Friday pointed to at least a slowdown in the rate of change. It’s not worth digging into the details, but the key takeaway is that the rate of change in inflation is slowing, as you can see below. Prices are still up year-over-year, but the month-to-month change is moderating.
This is a big deal in the permanent versus transitory inflation debate. And despite the higher year-over-year numbers, bond yields fell on Friday based on the slower month-over-month data.
What is really striking in the bond market is the fall in so called real yields. For example, the yield on the 10-year Treasury net of inflation expectations fell to new lows this week, as you can see below. The real yield closed at -1.18% in the U.S. In Europe they hit -1.65%.
This is really something – bond investors are willing to give up purchasing power for the perceived safety of government debt. And this is more fuel on the housing fire. 15-year mortgage rates hit another all-time low this week.
Charts We Found Interesting
1. Case counts in the U.S. continue to push higher.
2. If we are following the U.K. experience, the peak in cases could be four or five weeks out.
3. On the one hand it’s been a long time since the last 5% drop. On the other hand, some of these streaks have run twice as long as now. Oddly, most of the ultra-long streaks happened before zero interest rates and quantitative easing.
4. A few months ago, the Chinese authorities effectively canceled the IPO of Ant Financial. Then they went after other fintech companies, including those owned by Didi (China’s Uber) and Tencent (China’s biggest social media company). Now they are going after an entire industry – the $100bn private education business. New regulations will ban companies that teach school curriculum subjects from making profits, raising capital, listing on stock exchanges worldwide, and also prevent them from accepting foreign investment. As you would expect, the stocks were hammered.
Dan Wang at GaveKal Dragonomics captured the situation well back in a 2019 letter where he argued that China would go after ‘non-productive’ tech companies while at the same time supporting other more important sectors:
“I find it bizarre that the world has decided that consumer internet is the highest form of technology. It’s not obvious to me that apps like WeChat, Facebook, or Snap are doing the most important work pushing forward our technologically-accelerating civilization. To me, it’s entirely plausible that Facebook and Tencent might be net-negative for technological developments. The apps they develop offer fun, productivity-dragging distractions; and the companies pull smart kids from R&D-intensive fields like materials science or semiconductor manufacturing, into ad optimization and game development.
The internet companies in San Francisco and Beijing are highly skilled at business model innovation and leveraging network effects, not necessarily R&D and the creation of new IP….I wish we would drop the notion that China is leading in technology because it has a vibrant consumer internet. A large population of people who play games, buy household goods online, and order food delivery does not make a country a technological or scientific leader…These are fine companies, but in my view, the milestones of our technological civilization ought to be found in scientific and industrial achievements instead.”
5. Tokyo remains on track to be the hottest Summer Olympics in history.
6. The Financial Times had a good piece that covered how agricultural production will change in the coming years. Note how Canada and Russia are likely to dominate wheat production by 2070.
7. Who are these people that think they could beat a grizzly bear in a fight? And there is no way anyone is beating a Chimp in an unarmed battle.
Have a good weekend.
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