The $73.3 Billion Trade Deficit, Surprising Payroll Gains, and Skyrocketing Commodity Prices

Despite a strong recovery in manufacturing activity, the U.S. trade deficit climbed to a record high of $73.3 billion in August. Sentiment is already split on what to expect from Q3 GDP, and a complex labor market is unlikely to be much help. The ADP payroll report surprised to the upside with gains in all primary sectors in September, but worker expectations—and their conditions for returning to work—have changed. And how will the shocking number of workers who retired completely during the pandemic affect economic growth going forward? Meanwhile, it’s no secret that equities have grown more volatile in recent weeks, but how does index composition affect investor experience of market swings? And the debt ceiling reprieve and surprising strength of the ADP report helped steady stocks after losses earlier in the week, but will it be enough to carry them through an uncertain earnings season? Finally, inclement weather and persistent supply chain disruptions have sent the price of cotton, natural gas, and shipping skyrocketing. How long will it be until true inflation follows suit?

1. USD strength has other contributing consequences. Our trade deficit hit a new record:

Source: The Daily Shot, from 10/7/21

2. So who is going to be right? (Hint: they both are often wrong!)

Source: The Daily Shot, from 10/7/21

3. While job openings are near records, the ADP jobs report was strong (again, often inaccurate), and the surplus unemployment benefits have ended, many Americans are reluctant to return to work:

Source: Dallas Federal Reserve, from 10/7/21

4. “OKaaaay, boomer!” Time to chill! Covid induced ~4 million boomers to retire. Seriously, aging demographics will be a headwind much like the 1970’s.

Source: BCA Research, from 10/7/21

5. Will the moderation in the PMIs lead to a moderation in earnings?

Source: The Daily Shot, from 10/7/21

6. Remember, whenever someone says “This time it’s different”, the markets remind us it is not so. When the 10-year U.S. equity return is about twice the 25-, 50- and 100-year returns, we stop and wonder what is next.

Source: Deutsche Bank Research, from 10/7/21

7. Stock market volatility is increasing:

Source: The Daily Shot, from 10/6/21

8. The market cap weighting of these major indices “hides” the underlying magnitude of the recent pullback/correction/bear:

Source: Charles Schwab from 10/7/21

9. Bond macro-cycles are longer than most working careers. Most research and bond “wisdom” ignores these cycles:

Source: The Daily Shot, from 10/6/21

10. It is not just the Fed who has been offering massive support to buy bonds with QE. As central banks move to taper, the amount of bond supply hitting the market will skyrocket. Will interest rate increase be driven by the supply-demand equation?

Source: The Daily Shot, from 10/7/21

11. Extreme weather is to blame for this price spike; now clothing prices are rising quickly:

Source: The Daily Shot, from 10/7/21

12. Covid related supply disruptions (no truck drivers), together with the conversion to clean energy (lower than expected wind and solar output), has created a massive shortage and price hikes in European natural gas. This will cause a jump in European inflation:

Source: The Daily Shot, from 10/7/21

13. The global supply chain means the U.S. feeling it too:

Source: The Daily Shot, from 10/6/21

14. Shipping costs have gone ballistic:

Source: The Daily Shot, from 10/7/21

15. This is not a drill!:

Source: The Daily Shot, from 10/7/21