Digesting Delta

The coronavirus has a more contagious variant that is spreading but fortunately vaccinations are providing protection against severe reactions to the virus. The concern for markets is that the politicians will shut-down the economy but I think that is a long-shot as economies around the world need to get back to business. The inflation we are seeing across the globe is largely a supply issue as corporations are more likely to horde raw goods as a hedge against disruptions from government shut-downs. This also has implications for just-in-time inventory and how much liquidity is tied up in raw goods but that is a discussion for next year. I expect this variant will finally get the message across to the unvaccinated that this virus is here for the duration and a shot in the arm is preferred to a hospital bed and a ventilator.

In the chart below for the month of July, there was a sharp drop mid-month in the S&P 500 only to rebound and close out the month near all-time highs. The last several sessions have shown consolidating price action which normally precedes another move higher. The market looks to be digesting the potential repercussions of the delta variant and so far there seems to be little change. However, the central banks now have another reason to stay on perma-hold regarding their monetary policies and the last time I checked the stock market swims upstream in pools of liquidity.

S&P 500 Futures

Chart of the Week!

Lots of talk in the media on the delta variant of the coronavirus and you can see in this chart below that new cases are rising in the month of July. Fortunately, the number of deaths (black line) is not tracking the new cases so that must mean that the vaccinations are providing some measure of protection to the global population – we will see if this relationship holds in the coming weeks. According to this chart, about half of the world’s population has been vaccinated which is good progress and should help in keeping the delta variant from overwhelming hospital systems.

Global COVID Data

Economic & Central Banking Snippets 

  • Core CPI is running at an annualized pace of 4.8% year to date and by 6.2% over the past 4 months.
  • The Chicago manufacturing index for July jumped to 73.4 from 66.1 as new orders rose 5.4 pts m/o/m while backlogs were up by 3.4 pts to a two month high. “Companies noted a lack of raw materials and warehouse personnel, leading to an increased backlog of work.” (Boockvar)
  • The July consumer confidence index printed 81.2 which is down from 85.5 in June and the weakest figure since February.
  • Home prices in May rose 17% compared to 2020 according to S&P CoreLogic – a pace never before seen. Phoenix, San Diego and Seattle all reported north of 20% annualized home price gains. Chicago saw the slowest pace of gain at 11.1% followed by Minneapolis at 12.8%.
  • Core durable goods orders were up 0.5% compared to June and May was revised up by 0.4%.
  • The Fed’s favorite inflation indicator, the PCE Core Deflator, rose to +3.5% YoY (3.4% in May) – the highest since July 1991. Fed Chairman Jerome Powell said in their press conference on Wednesday that the rate of inflation had caught them by surprise. However, the Fed only mentioned of perhaps reducing bond purchases later this year so who knows when they will try to rationalize monetary policy.
Core PCE FRED data.

Macro Snippets

  • Procter & Gamble posted sales gains in almost every business unit in the most recent quarter, and predicted slower sales and higher costs for materials and transportation in the year ahead.
  • Volkswagen posted record first-half earnings Thursday and raised its profit margin target, but lowered its forecast for 2021 deliveries, citing competition, supply chain problems and stricter emissions requirements.
  • Qualcomm reported net profit of about $2 billion for the recent quarter, more than double the figure in the year-ago period.
  • Ford: The car maker posted a surprise second-quarter profit and raised its earnings outlook for the year, saying it sees an easing to the computer-chip shortage that has hampered vehicle output for months.
  • Alphabet: Google’s parent company also reported its highest quarter ever for sales and profit, amid a gusher of online advertising from businesses vying for customers.
  • Coffee prices jumped to a six-year high as a Brazilian frost threatened the crop. The cold snap is the second weather shock in recent months to strike farmers in Brazil, the world’s biggest coffee producer. (WSJ)
Coffee futures contracts 2021.
Paul J. McCarthy

That is all for now and thank you for being a subscriber!


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.