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Key Points for the Week
The Delta variant could take a toll on economic growth.
There was some good news last week. The 7-day moving average of COVID-19 cases in the United States declined. The bad news was that the rate of infection remained about 99 percent higher than it was one year ago.
As Delta variant infections surged across the United States, expectations for economic growth dropped more sharply than anticipated. Lisa Beilfuss of Barron’s reported on changes to third-quarter forecasts for U.S. gross domestic product (GDP) growth.
Goldman Sachs cut its forecast to 3.5% from 5.25%, Oxford Economics revised its call to 2.7% from 6.5%, and Morgan Stanley lowered its estimate to 2.9% from 6.5%. That’s as the Atlanta Fed’s GDPNow model predicts 3.7% for the quarter, down from 5.3% at the start of the month.
Lisa Beilfuss, Barron’s
Economists aren’t the only ones revising expectations. Some companies have cautioned that their revenue and earnings expectations were too high. Several airlines reported that cancellations have increased and ticket purchases have declined, which will impact the companies’ financial performance. In addition, some manufacturers indicated that unresolved supply chain issues and the high cost of raw materials will affect their performance for the quarter, reported Yacob Reyes and Sam Ro of Axios.
A chief investment officer cited by Axios said it’s unlikely that many more companies will cut their revenue or earnings forecasts; however, “…he does expect fewer companies to announce better-than-expected earnings when they announce Q3 results.” During the second quarter of 2021, 87 percent of companies in the Standard & Poor’s 500 Index reported better-than-expected earnings.
July job openings increased to 10.9 million, up 779,000 from June. The record number suggests weaker August job growth was partly related to a low supply of workers and a high demand for workers.
European economic growth isn’t vigorous, but it has improved enough for the European Central Bank to scale back its bond purchases. Inflation pressures also spurred the ECB to tweak its policies. Producer prices in the U.S. and China surged 8.3% and 9.5% respectively as input costs continue to increase globally amid supply shortages and resurgent demand.
Stocks retreated on concerns that the economy will slow because of the resurgence of COVID-19. The S&P 500 and MSCI ACWI both slid, while the Bloomberg U.S. Aggregate Bond Index was roughly unchanged. U.S. and Chinese retail sales data, along with U.S. consumer data, headline key releases this week.
It’s September and paper airplanes were flying across screens at the 31st First Annual Ig® Nobel Prize virtual ceremony.
The Ig Nobels recognize the unusual and celebrate the imaginative to rouse interest in science, medicine and technology. Every year, 10 prizes are awarded for research that makes people laugh and also makes them think. Commemorative awards are given to the winners by actual Nobel laureates. This year’s outstanding research included:
Biology prize: Susanne Schötz, Robert Eklund and Joost van de Weijer received an Ig Nobel for their work in cat acoustics. The introduction to “A Comparative Acoustic Analysis of Purring in Four Cats” explains, “The domestic cat is one of the most popular pet animals in the world, and virtually everyone is familiar with its trademark ‘purring’ sound. Contrary to what might be believed, it is not known exactly how purring is produced, and there is a surprising lack of studies of purring, even descriptive.” The scientists have also studied cat chirping, chattering, trilling, tweedling, murmuring, meowing, moaning, squeaking, hissing, yowling, howling and growling.
Ecology prize: Did you know the United Kingdom spends almost 70 million euros each year cleaning chewing gum residue from pavement? In addition to providing that bit of trivia, Ig Nobel winners Leila Satari, Alba Guillén, Àngela Vidal-Verdú and Manuel Porcar offered insight to “…the microbial content of [improperly discarded] chewing gums sampled in different locations worldwide as well as the distribution of bacteria depending on the depth (surface, intermediate and bottom layers of the residue).” The findings may have implications relevant to forensics, contagious disease and cleaning up chewing gum.
Chemistry prize: “Proof of Concept Study: Testing Human Volatile Organic Compounds as Tools for Age Classification of Films,” which has 10 contributing authors, examined a new method for rating movies: Measuring the emissions of humans watching the movies. “Humans emit numerous volatile organic compounds through breath and skin. The nature and rate of these emissions are affected by various factors including emotional state. Previous measurements of [these emissions] in a cinema have shown that certain chemicals are reproducibly emitted by audiences reacting to events in a particular film.”
Transportation prize: Have you ever wondered whether hanging a rhinoceros upside down would affect its health, a team from Cornell University has the answer. These researchers suspended a dozen tranquilized rhinos upside-down for 10 minutes to simulate a common form of transfer used by wildlife conservationists in Africa. The finding, published in the Journal of Wildlife Diseases, was that it may be safer to transport a rhino upside down rather than on its side.
Prizes also were awarded in the fields of entomology, physics, kinetics, medicine, economics and peace.
Last week, U.S. President Joe Biden and Chinese President Xi Jinping held their first phone call in seven months. The leaders of the world’s two largest economies had “a broad strategic discussion” on economic issues, climate change, and COVID-19.
Phone calls like these are used to reassure the public that both presidents are working to resolve some of the challenges between the two countries. Investors should pay close attention as many leading companies may be affected by changes in the relationship between the two economic giants.
China has been listed as a top five risk in our quarterly market outlook for most of the last three years. The relationship between the U.S. and China has become more competitive and tense in recent years, primarily because of a lingering trade imbalance. The trade deficit between the U.S and China continues to widen. U.S economic stimulus efforts have likely contributed by encouraging U.S. consumers to purchase more goods during the pandemic. Invariably, some of those goods were manufactured in China.
In recent months, China has signaled an authoritarian turn in its approach to economic issues. The Chinese government has made clear that corporations need to follow Beijing’s lead. In June, China’s largest ride-hailing company went public in the U.S. Chinese officials had expected the company to delay its offering. In response, China put the company under a cybersecurity review and banned it from accepting new users. Earlier, a Chinese financial company was forced to call off its IPO because of government pressure.
China is also tightening internet regulation. The country recently announced more stringent rules governing how internet companies can use personal data. It even went so far as to ban online lists that rank celebrities by popularity and to limit wasteful spending on endorsed goods. Perhaps the most drastic change is China’s move to limit video game playing to three hours per week for individuals under 18.
The investment implications from U.S-Chinese relations and changes inside China will play out for years to come. In the near term, the growing trade deficit and potential policy changes raise the risk of reigniting the trade war between the two countries. The Chinese also seem to be leaning toward tighter regulation of companies and information. While gaming restrictions may provide China with better-educated citizens more able to compete effectively in the world, they may also undercut Chinese game designers from competing in a rapidly growing industry.
One of the downsides to covering market information on a weekly basis is it becomes easier to miss the forest for the trees. None of the issues in this week’s update warranted a major analysis in the week they happened, but collectively they suggest China is adjusting its approach to issues likely to affect the global economy in coming years.
September 14, 1814: Francis Scott Key Pens “The Star-Spangled Banner”
On September 14, 1814, Francis Scott Key penned a poem that would later become America’s national anthem, “The Star-Spangled Banner.” The poem, originally titled “The Defence of Fort M'Henry,” was written after Key witnessed the Maryland fort being bombarded by the British during the War of 1812. Key was inspired by the sight of a lone U.S. flag still flying over Fort McHenry at daybreak, as reflected in the now-famous words of the “Star-Spangled Banner”: “And the rocket’s red glare, the bombs bursting in air, gave proof through the night that our flag was still there.”
After one of Key’s friends, Dr. William Beanes, was taken prisoner by the British, Key went to Baltimore, located the ship where Beanes was being held and negotiated his release. However, Key and Beanes weren’t allowed to leave until after the British bombardment of Fort McHenry. Key watched the bombing campaign unfold from aboard a ship located about eight miles away. After a day, the British were unable to destroy the fort and gave up. Key was relieved to see the American flag still flying over Fort McHenry and quickly penned a few lines in tribute to what he had witnessed.
People began referring to the song as “The Star-Spangled Banner” and in 1916 President Woodrow Wilson announced that it should be played at all official events. It was adopted as the national anthem on March 3, 1931.
You can be pleased with nothing when you are not pleased with yourself.
Lady Mary Wortley Montagu, Aristocrat and Poet
Only those who will risk going too far can possibly find out how far one can go.
T.S. Eliot, Poet and Essayist
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