U.S. Trade Deficit at Record High, Global Bond Yields are Falling, and the Delta Variant Causing More Economic Uncertainty

The U.S. trade deficit hit another record high this week as demand for domestic goods is on the rise. But many consumers are still choosing to save as the impact of the Delta Variant is still unknown. The services sector also hit a record, pointing to rapid growth, but is this just temporary as services are still in the reopening phase? Price pressure in both goods and services show no sign of slowing, but despite the surge and stock markets hitting record highs, stock valuations have been improving. Although, the bond markets might be telling a different story. Similar trends are happening across the globe as European business activity is growing at the fastest pace since 2007. Germany recorded expansions in activity as Covid-19 restrictions ease but inflationary pressure remains high. Despite this growth, Bund yields continue to fall with the whole yield curve dipping into the negative. The Delta Variant remains the big unknown and accounts for most of new cases across the world. If places like China cannot contain the variant, global supply chains could suffer. Will all the progress toward “normalization” be lost?

1. General uncertainty and the Delta variant resurgence is keeping the U.S. consumer in savings mode:

Source: The Daily Shot, from 8/6/21

2. As the PMI for Goods moderates, the PMI for Services hit a new record. The questions remains: Will this surge be temporary/transitory or will the U.S. consumer unleash trillions in spending?

Source: The Daily Shot, from 8/5/21

3. Just like with Goods, Services are able to pass on price increases due to the demand and cost increases:

Source: The Daily Shot, from 8/5/21

4. As the U.S. trade deficit hits another record high, one wonders if the deficit almost doubling makes it time to revisit our trade wars…

Source: The Daily Shot, from 8/6/21

5. Services PMIs in Europe are also setting record highs as their lockdowns are lifted. Price pressures are also similar to the U.S.

Source: IHS Markit, from 8/5/21

6. The World’s 9th largest economy has the same growth and inflation patterns as the U.S. and Europe, except their Central Bank just raised rates by 1% to stem inflation, the 4th hike this year:

Source: The Daily Shot, from 8/5/21

7. Something doesn’t add up. Yields have been falling as economic activity and inflationary pressures are rising.  What are the bond markets predicting?

Source: The Chart Store, from 8/5/21

8. And bond yields are falling in Europe…In Germany the entire yield curve is negative!

Source: The Daily Shot, from 8/5/21

9. Despite the surge in prices, the S&P 500’s earnings have kept up and even allowed the P/E ratio to decline (it is still high relative to historical levels):

Source: The Daily Shot, from 8/6/21

10. Based on the magnitude and slope of this bull market, perhaps a rest is in order!

Source: The Daily Shot, from 8/5/21

11. Will China be able to contain the Delta variant? If not, it will not be good news for global supply chains!

Source: Bloomberg, from 8/6/21

12. Some perspective; the Delta variant is now essentially all of Covid:

Source: The Daily Shot, from 8/5/21

13. Fidelity sees the economic expansions following the respective Covid recoveries:

Source: Fidelity Investments, from 8/5/21

14. While initial unemployment claims fell to “only” twice the pre-pandemic levels, continuing claims are still ~8X pre-pandemic levels:

Source: Scotiabank GBM Portfolio Strategy; Bloomberg, from 8/6/21