Stocks are trading lower, giving up second quarter gains as the delta variant of Covid-19 spreads. Consume spending confidence has dropped since June as consumer spending shows signs of reduction. Airlines are seeing bookings decrease some and cancellations are a bit higher than normal. This week consumer retailers such as Walmart, Home Depot and Macy’s and Kohls are due to announce second quarter results and predictions for the remainder of the year. Stocks were trending lower on Wall Street ahead of earning reports. Stocks in Asian and Europe also trended down slightly.
The federal reserve is possibly going to reduce bond purchases and mortgage backed securities (MBS) as part of its quantitative easing policy as more regional board governors see inflation as becoming more of a risk beyond a temporary transient issue. A decision to ease federal tapering of assets is expected sometime in September through December, and is expected that the fed will taper its economic support of the economy which many ordinary Americans have forgotten was happening or didn’t even know about. It is hoped that by easing the Federal Reserve economic support, that will be enough to get ahold of inflation.
Fed Chairman Jerome Powell has been reluctant to ease up on asset purchases of bonds and MBS’s but recent comments by Powell suggest he might be chasing his view and go along with the board’s calls to action.
Inflation stats this past week showed a minor moderation in consumer prices, but overall inflation pressure is still growing. This had led some Federal Reserve officials to predict inflation problems could continue into next year. Powell did say the decision to taper would be left up to the Federal Reserve committee which is made up of the regional federal reserve banks.
Inflation started trending up significantly as the economy reopened following last years lockdowns due to the pandemic. Consumers saved money and had pent-up demand to travel and spend, and did so strongly enough and with supplies running lower in many sectors, prices began moving upwards. Many consumers didn’t notice some prices increase as retailers got smart on how to hide it. Cereal giant General Mills quietly reduced the amount of cereal in its boxes but didn’t reduce the price, this is another form of inflation that not as visible to consumers but has the same effect on the economy. In fact, a survey of economist at Fortune 500 companies found that 65% thought inflation is becoming a serious issue. Once inflation get’s too high to be corrected through the market economy, often federal banks are forced to increase interest rates so high that it puts the economy into a recession. This was the case back in the 1980’s when mortgage interest rates hit as high as 21% in some places, 15%-18% is most other places. This in turn caused a recession which saw millions lose their jobs and go on unemployment and government assistance. But that hardship Americans endured did stop inflation from rising uncontrollably and bring it back to normal levels which allowed interest rates to drop.
Investors have started to pullback from making large investments into certain sectors that are vulnerable to inflation and consumer spending reductions and the housing marketing, including buying and selling as well as new home builders. This has caused a small slowdown in the housing market to become noticeable as investors watch to see if the housing slowdown stays small and short-term or if the slowdown grows. This in turn is beginning to ease prices on home sales.