Stocks start the week softer

Morning Note

Risk-off: Equities are showing softness in early trade Monday with the major European bourses lower after a weak session in Asia. We can look to Covid-related slowdowns, particularly the spread of delta in Asia, softer-than-expected Chinese data, and the fallout from a very poor University of Michigan consumer sentiment report on Friday. I’d even speculate that the tragedy in Afghanistan is a factor in the downbeat mood. This foreign policy disaster will have repercussions – President Biden will never recover from it. The scenes of chaos as the US evacuates Kabul is too reminiscent of Saigon.  


Nevertheless, after a decent run-up – record highs on Wall St, a new all-time high for the DAX and a post-pandemic peak for the FTSE 100, some giveback can always be expected. US futures were softer and the VIXX has jumped to 20 this morning with 10yr Treasury yields down to 1.26%. Meanwhile, oil is weaker and gold and Bitcoin firmer. 


Stagflation index: We had the weakest Michigan consumer confidence number since 2011, as the consumer sentiment index slumped to 70.2 from 81.2 last month. This was the third-worst reading in 50 years. Meanwhile, 5-yr inflation expectations rose to 3% from 2.8% as consumers worry that the permanent erosion of $ purchasing power will be a problem. 


UoM: “There is little doubt that the pandemic’s resurgence due to the Delta variant has been met with a mixture of reason and emotion. Consumers have correctly reasoned that the economy’s performance will be diminished over the next several months, but the extraordinary surge in negative economic assessments also reflects an emotional response, mainly from dashed hopes that the pandemic would soon end. In the months ahead, it is likely that consumers will again voice more reasonable expectations, and with control of the Delta variant, shift toward outright optimism. Consumers’ reaction to Delta’s modestly higher precautionary measures indicates the difficulty of producing optimal policy responses.” 


Meanwhile, the Delta variant is spreading, and China’s economy is slowing –  industrial production rose 6.4% vs 7.8% expected. Japanese GDP was more robust as it avoided a double-dip recession, but the major Asian economies are not a source of enormous confidence right now. 


Taper talk: Minneapolis Fed president and arch-dove Neel Kashkari said he would “feel comfortable” with tapering asset purchases “If we see a few more jobs reports like the one we just got”. He also stressed the Fed needs to “pay attention to… the inflation side of our dual mandate”. Yes, that would be a good idea…