You probably can’t pin this week’s losses in the stock market to any one particular thing. Soft retail sales, signs the Fed wants to make policy a little less generous, bear market in Hong Kong, COVID, Afghanistan, low volume summer trading? Take your pick. All probably conspired to some degree to weigh on sentiment if nothing else.
From an economic perspective, the highlight (or lowlight, depending on your perspective) was the retail sales number for July. It surprised most everyone by contracting -1.1% versus an expected increase of +0.3%.
It’s impossible to separate the impact of the fading stimulus boost from the possible hit due to the Delta variant, which began to hit restaurant and travel numbers in late July. You can see this in the number of people passing through TSA checkpoints in the U.S. over the last few weeks. Not a big decline but certainly coming off the boil.
The other major market related news concerned the release of the Fed’s minutes from their July meeting. No surprises here – the Fed says they want to reduce their asset purchases (termed quantitative easing or QE), likely before the end of the year. This issue will be in focus next week as well given that the Fed gathers at Jackson Hole for their annual conference.
Why does this matter? As The Economist noted on Friday:
‘On current forecasts rich-world central banks’ balance-sheets will have reached a combined $28trn in size by the end of the year, about two-fifths of which is attributable to QE during the pandemic. Critics says central banks face a “QE ratchet” because their bond holdings only go in one direction: they surged after the global financial crisis and never fell much before the pandemic struck. Even many emerging markets, now grappling with an inflation problem, have dabbled in QE and must soon decide its future.’
There is an element of ‘generals fighting the last war’ here. QE seemed to work well enough to help stabilize the markets during the financial crisis, but many have questioned the effectiveness since. Certainly, government spending and tax policy has played a starring role during the COVID crisis – zero interest rates and QE are almost background noise.
But market liquidity still matters, and anything the Fed might do to lessen the liquidity environment will be of interest to investors.
Charts We Found Interesting
1. Number of U.S. COVID cases on the rise. Is this the fourth or fifth wave?
2. Unwelcome news from Israel, especially considering they led the way in vaccine rollout.
3. One in five ICUs in the US have reached or exceeded 95% of beds occupied.
4. How the case fatality rate has changed over time in the U.S. and Israel.
5. As we head into Jackson hole next week it is worth noting that the Fed has been buying $40bn a month of mortgage securities. With the caveat that we shouldn’t confuse correlation with causation, the apparent link between home prices and Fed policy is striking.
6. Hong Kong equities hit a bear market due in large part to China’s regulatory crackdown.
7. As countries move up the development curve what do they consume more of? Meat? Transportation? Education? All true, but add air conditioning to the list.
8. How will the demand for AC coexist with the goal for a zero-carbon future? I’m not sure anyone knows the answer to this, but batteries will probably play a role.
Have a good weekend.
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