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The Missile – May 14

The consensus is for today’s April retail sales report to show a solid increase of +1.0% m/m and +0.7% m/m ex-autos.  That would follow the upward spike seen in March of +9.7% m/m and +8.4% m/m ex-autos.  That spike was due to the $1400 stimulus checks that went out in March.  Consumers in April continued to spend what was left of their stimulus checks.

Consumer spending is also being driven by the huge pile of cash that consumers saved during the pandemic when they couldn’t travel or go out to restaurants.  The strength in consumer spending is giving a huge boost to U.S. GDP, which is expected to surge by +8.1% in Q2 and +7.0% in Q3.  The consensus is for calendar-year 2021 GDP growth of +6.3%, easily overcoming the -3.5% decline seen in 2020.

Meanwhile, today’s preliminary-May University of Michigan U.S. consumer sentiment index is expected to show an increase of +1.9 to 90.2, adding to April’s rise of +3.4 to a 1-year high of 88.3.  The consumer sentiment index has now retraced a little over half of last year’s pandemic plunge.

Consumer sentiment is seeing support from (1) the plunge in the pandemic statistics and the increased freedom of vaccinated people to travel and visit restaurants, (2) the improving labor market, (3) improved household finances from the big pile of cash that consumers saved up during the pandemic, and (4) the sharp rise in home prices that has boosted consumer wealth.

 The consensus is for today’s Apr manufacturing production report to show a +0.3% m/m rise, which would add to March’s surge of +2.7% m/m.  The broader April industrial production report is expected to show an increase of +1.0% m/m, adding to March’s increase of +1.4% m/m.

The U.S. manufacturing sector is getting a big shot in the arm from the surge in U.S. GDP growth.  However, there is still some caution in the manufacturing sector due to bottlenecks, higher shipping costs, higher metal costs, and the chip shortage.

 The U.S. stock market on Thursday staged a moderate recovery after Wednesday’s sharp decline.   The S&P 500 index on Thursday rallied by +1.22%, recovering more than half of Tuesday’s plunge of -2.14%.  The Nasdaq 100 index on Thursday rallied by +0.83%, recovering less than a third of Wednesday’s sharp sell-off of -2.62%.

Stocks staged a partial recovery Thursday after comments suggested the Fed is sticking to its theme that the current inflation surge will be transitory.  Fed Governor Waller on Thursday said that he sees the current strength in the inflation statistics as “temporary.”  He also said, “We will not overreact to temporary overshoots of inflation.”

The markets were surprised on Wednesday by the much stronger than expected CPI report of +0.8% m/m headline and +0.9% m/m core.  On a 3-month annualized basis, the headline CPI soared by +7.2% and the core CPI was up by +5.6%.

There was some favorable inflation news on Thursday when the 10-year breakeven inflation expectations rate fell -3 bp to 2.54%, which was 5 bp below Wednesday’s 8-year high of 2.59%.  The inflation expectations rate fell on Thursday after crude oil prices plunged by -3.42% on the news late Wednesday that Colonial pipeline reopened its pipeline.

The markets will continue to focus on the inflation outlook due to fears that the Fed may yet be forced into tightening monetary policy sooner than expected if inflation starts to show a persistent increase.

 A group of Republicans led by Senator Shelley Moore Capito (R-WV) met with President Biden on Thursday and said they would present a more detailed infrastructure proposal next week.  Their last infrastructure offer totaled $568 billion, which is far below Mr. Biden’s proposal of $2.25 trillion.

Republicans have some red lines, including that a deal involves traditional infrastructure and leave intact Republicans’ 2017 tax cuts.  Mr. Biden invited them to offer some different pay-fors if they are not willing to raise corporate taxes.

There is clearly some political performance art in progress since the odds of a Democratic-Republican deal on infrastructure are virtually nil.  However, Mr. Biden made campaign promises to work in a bipartisan manner, and he also needs to convince Democratic moderates such as Democratic Senator Manchin that he is making a serious attempt to compromise with Republicans.

In the end, however, the more likely outcome is that House Democrats will proceed with their own plan based on Mr. Biden’s proposal.  House Speaker Pelosi has said she would like to have a House infrastructure bill finalized by July 4th and send it to the Senate for its passage before its August recess.  However, that timing is very uncertain since Democrats have not even decided yet whether they will split up Mr. Biden’s $4 trillion job and family plan or just end up passing it as one massive bill.

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