Bulls Tap the Brakes on Delta Variant Concerns

After hitting another all-time high on Monday, the Dow Jones Industrial Average ended the week down -1.11%. Rising concerns over slowing global growth as Delta variant cases spiked around the world along with weak U.S. consumer spending and housing starts managed to knock the Dow Jones Industrial Average from its peak. Disappointing data from China served to temper optimism for a global growth revival as the country reported retail sales and factory output slowed sharply month-to-month in July. In the U.S., retail sales disappointed as purchases dipped due to global supply constraints in the auto market and as consumers grew increasingly cautious in late July. The housing market, which had been a bright spot throughout much of the pandemic, struggled to make gains as surging costs prompted builders to hold off on breaking ground on new homes.

 

Summer started off strong as consumers took their long delayed 2020 vacations, hitting up their favorite hotels, restaurants and bars. Unfortunately, the spending came to an abrupt end as a surge in delta variant cases towards the end of July prompted consumers to rein in their purchases. Month-to-month, retail sales fell -1.10%, worse than the -0.30% decline economists had forecasted. The drop was broad-based with motor vehicle sales leading the declines, falling -4.30%. The car lot has had a tough time keeping cars in stock due to a global chip shortage, which has led to fewer cars rolling off the assembly line. Supply looks like it will remain tight for the time being as more automakers move to idle plants. Toyota, who had been largely immune to the chip shortage until late, announced this week it would cut production. It is anticipated that this will lead to a 40% hit in their supply next month. The back-to-school shopping season also appeared to be off to a slow start as sales at online retailers fell -3.10%. Parents appear to be more cautious in opening their wallets ahead of an uncertain school year, sending sales at clothing and sporting goods stores down -2.60% and -1.90%, respectively. Restaurants and bars still managed to eke out a 1.70% gain due to the head start they had from the beginning of the month. Yet, that growth figure was lower than June’s 2.40% rise, reflecting diminishing marginal growth. Moreover, we have yet to see the full extent of the drop in July consumer spending given that the retail sales report excludes many service categories such as airline ticket sales which have reported a decline as more travelers move to cancel their late summer travel plans.  

 

Folks seeking new homes will be disappointed to know that builders are slowing their construction pace. Amid unrelenting supply constraints, housing starts fell -7.00% to a seasonally adjusted annual rate of 1.534 million units in July. The decline was driven primarily by a -13.10% drop in multi-family starts. Meanwhile, single-family starts posted a smaller decline, falling a more modest -4.50%. Building permits for future construction, however, did manage to rebound after three straight monthly declines, rising 2.60% in July. The increase was driven by an 11.20% jump in multi-family projects which more than offset the -1.70% drop in single-family permits. The rise in permits for the multi-family segment reflects a rebound in demand for rentals as the economy reopens, renters look to return to busy city centers, and as housing prices have put home purchases out of reach for some buyers. Single-family starts idled in July with the number of houses authorized – but not started for construction – holding at 145,000 units. That was the third highest on record, indicating builders remain hesitant to undertake new projects amid high land, labor, and materials costs.

 

Despite the week’s pullback, the Dow Jones Industrial Average continues to trade near its all-time high. Although disappointing economic data and a surge in Covid cases renewed concerns over slowing growth, the macro forces are such that investors remain confident. Friday’s trading session for instance seemed to bring dip buyers back into the market, with the index rallying 225+ points. Some of these macro forces may soon begin to change, however. Just this week the Fed minutes from its July meeting were released, indicating that the Fed is warming to the idea of tapering. The Delta surge may complicate the timeline somewhat, but the central bank appears to be adopting a tightening bias and no matter how clearly they may communicate that message, markets never seem to be happy when it actually happens.