The Week Ahead – Olympic Gold

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.

The 2020 Tokyo Olympics were very exciting with the U.S. finishing ahead in both total medal count, and the gold category. China came into the games with a very focused approach designed for one purpose: churning out gold medals for the glory of the nation. Silver and bronze barely counted. By fielding 413 athletes in Tokyo, the largest number since the Beijing Games in 2008, they narrowly lost the top slot to the United States.

If economic growth were an Olympic sport, the U.S. would easily take the gold. Nominal GDP growth came in at a staggering 13.0% for the second quarter, putting our economic output above its pre-pandemic level. Ultra-low interest rates and massive fiscal stimulus have both spurred activity. Of course, faster growth means greater inflationary pressures. Indeed, inflation increased at a 6.0% annualized rate in the second quarter. The inflation adjusted headline print or so-called real GDP growth came in at just 6.5%, which was below estimates. The disappointment was entirely due to a huge plunge in inventories. Markets took the number in stride, as the inventory rebuild will be a strong tailwind for next quarter. We believe third quarter growth could be as high as 10%.

We all know by now that inflation is a looming issue. Some of the sectors most impacted by Covid such as used car prices are certainly transitory, but there are areas where prices will not be coming back down:

• Rents are accelerating significantly and are likely to do so for some time
• Wages are rising
• Company pricing power has surged into record high territory

We are in the midst of the most stimulative global monetary policy in history. Over the past year, in order to rescue the global economy, central banks around the world dramatically increased their debt. To wit, the Federal Reserve and European Central Bank have doubled their debt loads to approximately 100% of GDP. We should expect another $2 trillion over the next year along with the continuation of zero interest rate policy. All this spending is likely to continue to push prices higher and be supportive of risk-assets. Those gold medals may be worth a good bit more in the coming years.

Despite the delta variant surge, job openings rose strongly notwithstanding robust hiring from continued economic reopening. We will see a lot of inflation data this week. We estimate the inflation (CPI) rose 0.4 in July, slightly above consensus. The key for markets will be if it is transitory or persistent pressures. It is likely we the Federal Reserve holds the line on their dovish stance that they will continue to focus on labor markets and keep interest rates at the zero bound for at least another year.

Data deck for August 9–August 13: