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Key Points for the Week

  • Job openings remain above 9 million in the U.S.
  • President Joe Biden signed an executive order designed to limit the market power of the largest U.S. companies.
  • Chinese consumer inflation rose only 1.1% in the last year, while Chinese producer prices surged 8.8%.
  • Our next Town Hall is scheduled for Wednesday, August 11th at 6 p.m.

Equity investors appeared to be focused on the United States Treasury bond market.

U.S. Treasury bonds rallied last week. Yields on 10-year Treasuries dropped from 1.43 percent at the start of the week to 1.27 percent on Thursday. The rally was quite a surprise, reported Randall W. Forsyth of Barron’s.

After all, the economy has been booming, accompanied by rising inflation – exactly the opposite of what would be conducive to lower [bond] yields and higher [bond] prices.

Randall W. Forsyth, Barron’s

As 10-year Treasury yields reached the lowest level since February, stock investors took time to consider what might have caused yields to retreat. Lower yields often suggest slower growth ahead. There may be potential for global growth to slow if:

A new wave of COVID-19 swamps the global recovery. Twenty-four U.S. states saw the number of COVID-19 cases move higher by 10 percent or more last week, reported Aya Elamroussi of CNN. The Delta variant of the virus accounts for more than one-half of all new cases and over 80% in some areas. Last week, the global death toll reached 4 million and Japan, host of the 2020 Olympic games, declared a state of emergency.

China’s banking system is in trouble. There was another surprise last week. “…China’s central bank announced a half a percentage point cut to banks’ reserve ratio requirements, potentially increasing the profitability of their loans but also stirring concerns about the health of their balance sheets following a debt-fueled property boom,” reported Naomi Rovnick, Thomas Hale, and Francesca Friday of Financial Times.

U.S. economic growth falters as monetary and fiscal stimulus recede. “…the bond market is now adjusting to the prospect of more moderate growth in the second half, with reduced fiscal largess and no $1,400 or $600 stimulus checks. And it’s looking ahead to the eventual prospect of the Federal Reserve throttling back its securities purchases, which currently pump $120 billion a month into the financial system,” reported Barron’s.

Investors shook off the bond market’s signal and took advantage of buying opportunities created by the dip, reported Financial Times. Major U.S. stock indices finished the week at record highs. On Friday, 10-year Treasury yields finished at 1.36 percent.

This Week in the Markets

The U.S. economy continued to show signs of a mismatch between demand and supply. Nearly 3 million workers have been unemployed for more than a year; yet, there are 9 million available jobs in the U.S. Matching those open positions with available workers remains key to a sustained economic recovery.

Expectations for future growth are showing mixed signs. Strong demand is pressuring Chinese producer prices, which increased 8.8% over the last year. Chinese consumer prices only increased 1.1%. Inflation risk seems to be ebbing in China. U.S. bond yields have been edging lower in recent weeks, and investors appeared to have become more concerned about future growth and less concerned about inflation.

President Biden signed an executive order designed to introduce more competition into the U.S. economy. The order instructs government agencies to adjust policies targeting merger review, noncompete clauses, and internet policies. This follows efforts by the administration to introduce a global minimum corporate tax rate and should be seen as an effort to reign in corporate power.

Stock investors don’t seem to view it as a serious threat. Large-cap stocks added to recent gains, and early earnings reports were strong. Last week, the S&P 500 and Bloomberg BarCap Aggregate Bond Index gained while the MSCI ACWI Index slid.

This week the U.S. and China report retail sales, and the U.S. will also report key inflation data. In light of recent declines in bond yields, the economic releases may have more impact than normal if either inflation or retail activity significantly outperforms expectations.

The Five Key Events of the Second Quarter

When market information comes to you weekly, or even daily, it can be hard to maintain perspective on the most important items. As Fight Club author Chuck Palahniuk noted, “The trick to forgetting the big picture is to look at everything else close up.” With that in mind, we stretch our time frame out (a little) and address five key events in the second quarter.

Reopening

The U.S. economy is nearly fully open. As larger cities and coastal states continue to open up, the demand for service workers has expanded. Restaurants and hotels are adding staff and, based on the job opening data shared above, wish they could hire even more. Travel data is improving. Movie theaters are reopening. However, many people are still struggling financially. The first fired are often the last rehired, and 30% of unemployed workers have been out of work for more than one year.

Delta Variant

The key to maintaining reopening momentum is to limit the number of new COVID-19 cases. The Delta variant is now the dominant strain in the U.S. and seems to be more contagious than the original variant, meaning the unvaccinated may be at greater risk. The vaccines may be slightly less effective against this variant. Increasing vaccination rates globally will be important to the economic recovery as it will allow workers to return to work and fill many of the open positions. A spectator-free Olympics is just one example of lost economic activity because of policies to prevent the spread of COVID-19.

Global Corporate Minimum Tax

Corporations have been steadily gaining power against governments. In 1970, the corporate tax rate was nearly 50%. In the 90s, it hovered near 35% before dipping to 21% during the Trump administration. Regardless of whether you see this as good or bad, countries have been forced to lower tax rates to be competitive and to dissuade companies from relocating to tax havens. A global corporate minimum tax is an effort to reduce competition between countries and maintain corporate taxes as a revenue source.

Afghanistan Pullout

The U.S. pullout of Afghanistan ends the U.S.’s longest armed conflict. The move signifies the U.S. being less active in foreign affairs. Since the end of the Cold War, the U.S. has been the world’s dominant power and has provided the military strength needed to keep shipping lanes open and allow for growth in a global economy. The move out of Afghanistan shows the U.S. continues to reassess its willingness to play such an active role and raises questions about the future of globalization.

China

China has been a big winner during globalization. Yet, its policy approach is changing. Whether using regulation to reign in corporations or being more active globally, China is becoming more aggressive. The country is the largest market for numerous commodities and will soon be the largest consumer market. Risks of economic conflict in Asia are higher as President Xi pursues a more aggressive posture than his predecessors.

One of the societal benefits of markets is they serve to aggregate opinions about significant events, of which there were many last quarter. The S&P 500 jumped 8.5%, so investors weighed these and other factors and thought the mix tilted toward the positive side.

Delays in Tax Refunds

The Taxpayer Advocate Service (TAS) has stated that it is aware that taxpayers are experiencing more refund delays this year than usual. Typically, the IRS processes electronic returns and pays refunds within 21 days of receipt. However, the high-volume of 2020 tax returns being filed daily, backlog of unprocessed 2019 paper tax returns, IRS resource issues, and technology problems are causing delays. Once a return is processed by the IRS and loaded onto the agency's systems, TAS may be able to assist with delayed refunds if taxpayers meet case acceptance criteria. TAS has a case criteria tool that can be used to determine if TAS may be able to offer assistance. www.taxpayeradvocate.irs.gov/can-tas-help-me-with-my-tax-issue/.

Be Aware of Text Message Scam

The IRS and Security Summit have issued a warning regarding a new text message scam which cites the availability of an economic impact payment. The goal is to have the recipient reveal bank account details. If you have any questions about this scam, please contact us.

Did you Know? This Week in History

July 15, 2006: Twitter Launches

On July 15, 2006, the San Francisco-based podcasting company Odeo, officially released Twttr, a short messaging service (SMS) for groups to the public.

Twitter’s co-founder Evan Williams asked his team of 14 employees to brainstorm their best ideas for his struggling startup, Odeo. One of the company’s engineers, Jack Dorsey, developed the concept of a service allowing users to share personal status updates via SMS to groups of people. By 2006, Dorsey sent the first-ever tweet (“just setting up my twttr”) on March 21.

Within six months after Twttr’s official launch in July 2006, Twttr, had become Twitter. Once the service became public, the messages were limited to 140 characters.

Although Twitter’s user base is much smaller than that of Facebook, it has increasingly become a source of breaking news and information, especially for younger users.

Weekly Focus

A champion is someone who does not settle for that day's practice, that day's competition, that day's performance. They are always striving to be better. They don't live in the past.

Briana Scurry, Former Goalkeeper, U.S. Women’s National Soccer Team

You don’t have to be great to start, but you have to start to be great.

Zig Ziglar, American Author