Econ Weekly (July 19, 2021)

Featured Place: Greenville-Spartanburg, South Carolina

Inside this Issue:

• Crisis in Prices? Latest CPI Again Shows Climbing Costs for Consumers

• The Transitorian: Powell Still Chill, Says Pricing Pain will Wane

• Bank Goodness: Lenders Just Fine Despite Lending Decline        

• Three Cheers for Ten-Years: Oddly, Demand Keeps Rising for Longterm Treasuries

• Lord of the Skies: Delta Mending as Travelers Start Spending

• Eating More, Paying More: Food Giant Conagra Says Demand Up, Costs Up

• Chuck E. Fees: Banks Earning Quite a Few Pennies from their Overdraft Levies

• Jassy’s Legacy: How Amazon Became King of the Cloud   

• Gassy’s Legacy: Is Natural Gasa Help or a Hindrance?

• Cash in the Cradle: Connecticut Gives Bonds to Babies  

• And This Week’s Featured Place: Greenville-Spartanburg, South Carolina, Upcountry Car Star

Quote of the Week

“Without any doubt, the place to look is the labor market… That’s what you need to do to understand the direction of the Fed, and to understand inflation… [The Fed’s] been very consistent on this. Until we have a lot more job creation in this country, and we see unemployment going back down, they are not going to move on rates.”

– PGIM CEO David Hunt

Market QuickLook

The Latest

How’s the economy doing? There’s a gusher of new clues, none more closely watched than the Labor Department’s monthly index on consumer prices. The June report leaves no ambiguity: Inflation is hot. But less clear is how concerned we all should be.

By now you know the arguments behind the transitory story: That high inflation readings reflect skewed y/y comparisons and largely unmeaningful spikes in isolated categories like used cars (which are by the way showing signs of coming down, reports Cox Automotive). Suppliers need time to adjust to an unforecastable surge in demand. And they will, say the tranquil. Fed chair Powell preached this sermon on Capitol Hill last week, hammering home his message: The top concern right now is jobs, not inflation.

Powell spoke before both Houses of Congress to present the Fed’s semiannual policy report, which paints a generally sanguine picture of the economy. But it does highlight some areas of potential risk. For one, “asset prices may be vulnerable to significant declines should investor risk appetite fall, interest rates rise unexpectedly or the recovery stall.” Leverage at hedge funds and life insurance companies, it adds, continues to be high. Transparency regarding hedge fund holdings is another concern (remember the Archegos affair?). There’s the Covid virus still lingering, of course. Still another worry: Structural deficiencies in short term money markets. There’s some uncertainty about the ability of borrowers in loss-mitigation programs to meet their obligations after those programs end and government support runs out. Business debt, furthermore, remains high relative to GDP, and thus also a potential vulnerability should interest rates rise.

But rates are certainly not rising now. Last week, the Treasury’s ten-year yield fell again, never mind the latest CPI readings. John Authers, a Bloomberg columnist, reviews some possible reasons. Maybe the market thinks inflation has peaked. Maybe it thinks growth has peaked. Maybe pension funds, after enjoying big stock market gains, are rebalancing their portfolios back to safe bonds. Maybe it’s foreigners driving demand for Treasuries, whose nominal rates are at least positive. Maybe it’s growing fear of Covid’s Delta resurgence. Maybe it’s a bet that new rounds of fiscal spending won’t escape Congress. Maybe it’s fear of what might happen to the economy if the Fed tightens sooner than expected. Or maybe it’s a reaction to underwhelming economic data from China, where slower growth could have a deflationary impact on the world.

In any case, while everyone’s buying Treasuries, indicators of consumer spending—perhaps the biggest driver of U.S. economic growth—remain solid. Encouraging too is a New York Fed business survey suggesting intent to boost investment spending. Washington, meanwhile, continues to debate a $1.2 trillion investment in infrastructure, alongside a new plan for $3.5 trillion in spending to address issues like climate change and the care economy. But passage of each is far from assured, leaving the possibility of no additional stimulus spending. Treasury Secretary Yellen, for her part, while championing global tax reform, can’t warn legislators enough about the risks of breaching a Congressional debt ceiling.

The risks of climate change are ever present as intense heat scorches the West, and as severe droughts threaten America’s farms. In the Fed’s latest Beige Book report on economic conditions around the country, the Reserve Banks of Minneapolis, Kansas City, Atlanta, Texas and California all mentioned drought as a current challenge for their agricultural sectors.

Oh, and last week marked the start of second quarter earnings season. Banks were in the spotlight, trumpeting strong results despite weak loan demand and low interest rates. UnitedHealth, a massive insurance and care provider, said demand for non-Covid care is starting to normalize after a period in which many Americans avoided non-urgent medical procedures. Delta, the country’s largest airline by many measures, sees demand roaring back so fast that it can’t keep up with staffing.

Earnings season is now in full swing, with reports this week from giants Coca-Cola, Netflix and IBM. Semicon colossus Intel reports too, amid talk that it might make a big acquisition. It’s a big week for telecoms with Verizon and AT&T up to bat. For more on inflation in the auto market, tune in to AutoNation’s call on Monday. D.R. Horton will talk housing. Biogen will field questions about its controversial (and expensive) new Alzheimer’s drug. Health care mega-players HCA and Johnson & Johnson report too. Railroads, restaurants, more banks, more airlines… it’s gonna be a busy week.

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