The Week Ahead – Lumbering Ahead

Written by Brett Dulyea, CFA, CAIA | 5/10/21 3:51 PM

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

Hope everyone had a wonderful Mother’s Day. Truly, a worthy holiday as mothers are so often the caregivers in our families and society in general. As we continue to deal with the fallout from the 2020 recession, a lot of the burden has fallen on the strong shoulders of women and particularly mothers. I know in my household many of the challenges of at-home learning have been handled by my wife. The recession hit hardest in the hospitality industry, which tends to be dominated by females. Those women, who were fortunate enough to keep their jobs, were too often faced with the unfair decision to either work or stay home to take care of young children. While schools have begun to re-open, it is often only part-time as it is for our school district. However, with the vaccines being rolled out so effectively and Covid-19 cases continuing to fall precipitously, it appears we are on track for kids returning to school full time this fall – fingers crossed.

As schools and businesses re-open, the economy continues to surge. With corporate earnings indicating a 45% annual increase, we are in the midst of the best corporate earnings season since 1994. Indeed, the Atlanta Federal Reserve Bank is now estimating second quarter GDP growth to come in at a blistering 13.6% (trend rate is approximately 2%). Vehicles sales are at an 18.5MM annual rate; this would have been even higher if it were not for supply shortages. By most measures, the economy is booming. We were completely caught off guard by April’s shockingly weak employment report. Payroll only increased by +266K last month (we expecting +1MM) and the unemployment rate actually ticked up to 6.1%. Both stock and bond markets rallied on this news as it bolsters the case for more fiscal support and allays fears that the economy overheats, forcing the hand of the Federal Reserve to start raising rates before 2024.

This week we will get another glimpse into some key economic indicators: Consumer Price Index, Jobless Claims, and Retail Sales. It is no secret that we are seeing inflation pushing up prices of just about everything. One example is the price of lumber, which is up 300% since last year. What is also amazing is that bond yields have remained quiescent in the face of rising inflation. If the bond market is correct (we think it is), it is due to the belief that inflation impulses are in fact transitory rather than structural. It is doubtful we will see a wage/price spiral develop with unemployment still at currently elevated levels. Inflation is certainly something that will continue to get a lot of mindshare, but as I learned in my Econ 101 class, higher prices are the cure for high prices. Over time the supply chain impacted by the pandemic will come online to meet surging demand bringing the dynamic back to a state of equilibrium. Until then, we can expect continued upward pressure on prices in the near-term.

Data deck for May 10–May 14:

Date

Indicator

Period

May 11

NFIB small-business index

Apr.

May 11

Job openings

Mar.

May 12

Consumer price index

Apr.

May 12

Core CPI

Apr.

May 12

Federal budget

Apr.

May 13

Initial jobless claims (regular state program)

May 8

May 13

Continuing jobless claims (regular state program)

May 1

May 13

Producer price index

Apr.

May 14

Retail sales

Apr.

May 14

Retail sales ex-autos

Apr.

May 14

Import price index

Apr.

May 14

Industrial production

Apr.

May 14

Capacity utilization

Apr.

May 14

Consumer sentiment

May

May 14

Business inventories

Mar.