US stocks are mixed as investors widely anticipate the passage of a $550 billion infrastructure package, while concerns grow the slowdown in Asia could feed into greater pricing pressures. Following a gangbuster nonfarm payroll report that closed out last week, the focus has shifted to Fed speak and pricing pressures. Overnight, inflation readings from Beijing led to worries that growth forecasts might have been too optimistic for the second half of the year. Risk appetite may struggle to extend this latest stock market rally since China’s manufacturing sector is barely hovering in expansion territory, delta variant shutdowns remain the biggest short-term risk, and on investor hesitancy to touch Chinese stocks. On Wednesday, US CPI could show pricing pressures are persisting as bottleneck issues remain. The selloff in commodities are driving growth concerns as some investors are turning cautious.
Fed’s Bostic comments on a potential September taper helped send Treasury yields to fresh session highs. Bostic stayed true to his hawkish self and voiced his favor of going relatively fast with on tapering and that he could see rate hike late in 2022 if the economy continues to improve. He mentioned he would not be surprised if yields returned to earlier summer levels.
Fed’s Barkin provided optimistic comments on the economy, noting that demand has not yet been impacted by the delta variant. He was not as hawkish as Bostic, adding that inflation expectations have been impressively stable. Barkin said pressure on wages are intense among lower-income levels, which suggests he’s not worried about runaway inflation.
The S&P 500 has made 44 record high closes this year, without a significant pullback since November. If the delta variant continues to lead to more restrictive measures globally, supply chain issues might not go away anytime soon. The Nasdaq might become the go-to trade this month as Wall Street debates when the Fed will signal tapering and more importantly why the Fed won’t be able to raise interest rates so much.
Job openings surged to another fresh record high, a sign that workers hold the cards and will be able to demand higher wages and greater flexibility when it comes to working in the office. The June JOLTS job openings rose to a series high of 10.1 million, much better than the 9.27 million consensus estimate, and upwardly revised 9.483 million prior reading. Wage pressures seem more likely and that may help the Fed pull the taper trigger a little sooner.
Treasury yields will likely end the year much higher, but rates may lower on seasonality factors, global growth concerns, and as the Fed remains in ultra-accommodative mode with their elevated QE program and as they drawdown in the Treasury’s cash balance.
The dollar was ripe for a rally given how bearish currency trades were positioned. While the greenback will have strong support given the rise in Treasury yields, as the market gets closer to the Jackson Hole Symposium it will likely become a choppy trade this month as currency traders refrain from adding massive bets until a clearer picture emerges of how the economy will look beyond peak macro and stimulus.
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