“No Decision” from Fed, Commodities Still on the Rise, and Will China’s Crackdowns Affect U.S. Credit?

After Wednesday’s Fed meeting, Fed Chairman Powell says the U.S. economy is still a good deal away from making “substantial further progress”. Investors are waiting for a characterization of the economic outlook and without one, the USD reacted. The economic growth over this past quarter was driven almost entirely by consumer spending from stimulus checks and money saved during lockdowns, but the Delta Variant might put a damper on that trend. Meanwhile, the Fed’s “favorite” inflation indicator, core PCE, soared 6.1% in the second quarter, the biggest increase since the early 1980s. Turning to Commodities, although Iron has followed Lumber back to more “normal” prices, Bloomberg’s Commodity Spot Index is approaching its high from a decade ago. In China, Beijing has stepped in to calm investors, but without a reversal on their crackdowns, will their high yield market put downward pressure on U.S. credit?

1. The Fed minutes indicated a “no decision” as the QE taper was put off as they “continue to assess progress in coming meetings”.  The USD reacted:

Source: The Daily Shot, 7/29/21

2. $13 trillion is a lot of money!  Now we are adding infrastructure and other large spending bills to the deficit. Remember, someone, or some generation(s), will have to pay this back!

Source: Deutsche Bank Research, from 7/29/21

3. The U.S. economy’s 6.5% 2Q21 growth was mostly driven by consumers. Will consumers continue to unleash the trillions of Pandemic savings or will the Delta variant keep them more subdued?

Source: The Daily Shot, from 7/30/21

4. Another sign of “NOT normal”. Business spending was robust in 2Q except on structures, where the Pandemic flight from offices shows a 20% reduction:

Source: The Daily Shot, from 7/30/21

5. We have demonstrated time and again why CPI undercounts inflation. The PCE is the Fed’s “favorite” inflation indicator and it shows what we all know:

Source: The Daily Shot, from 7/30/21

6. The Fed can remain patient as long as the velocity of money remains at these historically low levels. The Pandemic has induced savings, not rampant inflationary spending:

Source: The Daily Shot, from 7/30/21

7. Iron ore is following lumber back towards “normal” pricing:

Source: The Daily Shot, from 7/30/21

8. Yet commodities as a whole continue their price surge:

Source: The Daily Shot, from 7/30/21

9. Government crackdowns wiped out 1/2 trillion in value.  Now the Chinese government is talking nicely, but no crackdown was reversed…

Source: The Daily Shot, from 7/30/21

10. Some of the Chinese crackdowns have been warranted as excesses abound, especially in their debt markets:

Source: Bloomberg Barclays Index, from 7/30/21

11. All but the longest German bunds have negative yields yet their economy, and inflation, are robust. When will the ECB relent?

Source: The Daily Shot, from 7/30/21

12. Vaccine hesitancy is declining across the globe:

Source: The Daily Shot, from 7/30/21