US Close: Stocks drop on earnings and delta variant concerns, Dollar rallies

Risk appetite did not stand a chance given it is month end, peak earnings are passing by, and most of corporate America is still complaining about trouble finding workers and over persistent supply chain issues.  US stocks were dragged down by a big miss from Amazon and cautious comments from former FDA chief Scott Gottleib that he wouldn’t be surprised if, on the whole, we’re infecting up to a million people a day right now.

Big-tech seems unlikely to get another fresh catalyst here, so many investors look like they are ready to turn cautious as Wall Street becomes fixated over figuring out how soon will the economy make substantial progress in the labor market recovery.

Fed Speak

St. Louis Fed president James Bullard stated that the Fed should taper in the fall and finish tapering by early next year. He added that the Fed should have the option to move on interest rates if inflation does not come down next year.  The divide in the Fed will continue to grow, but the market won’t react unless hawkish shifts come from Clarida, Brainard, Waller, or Evans.

Amazon

Wall Street was also surprised by Amazon’s disappointing earnings results.  The pandemic boom for Amazon is over and this rare earnings miss will likely prove to be a buying opportunity for investors.  Retail growth had to slow down at some point and the investment in the future should prove positive for the stock’s long-term value.

US data

Today’s economic data didn’t really give financial markets a clear picture.  The standout was the 1.0% rise in June’s personal spending, above the consensus of 0.7%.  Personal income also came in slightly positive which bodes well for the robust US consumer.

The second quarter employment cost rose 0.7%, a miss of the 0.9% estimate, but that was hampered by a tight labor supply.  Nothing in today’s data suggest wages are about to skyrocket and that means the Fed will be in wait-and-see mode over the next few months.

The core PCE deflator rose 0.4%, a miss of the 0.6% estimate, but that hardly means inflation has peaked.  The Fed’s preferred inflation gauge, Core PCE year-over-year rose 3.5%, which was below the 3.7% consensus estimate.  Given the softer-than-expected inflation readings and modest income gain, the Fed can stick to the transitory script a while longer.

The July final reading of University of Michigan sentiment improved from 80.8 to 81.2, while expectations also bumped higher from 78.4 to 79.0.  The inflation surveys moderated with the 1-year outlook dipping to 4.7% and the 5–10-year outlook to 2.8%.  The US consumer is strong and that won’t change even give the current delta variant surge across the country.

FX

The dollar was mixed as risk aversion remained the dominant theme for the last trading day of week.  The greenback is slightly higher, while Treasury yields slumped as the China selloff deepens, negative Amazon earnings, rising worries over the delta variant, and headwinds for the IPO market.

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inflation
markets
interest rates
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Author: Ed Moya