The strong July jobs report caused a stir in the markets. Most notably, long-term interest rates – which were trending down – reversed course quickly. Was this an indicator that the economy is going to pick up steam from here? Our previous commentaries were filled with warnings from analysts who were predicting the economy could slow towards the end of the year. Which view is right?
For one thing, COVID will continue to have a lot to say within this argument. If the most recent surge due to the Delta variant intensifies, then the economy likely will slow as expected. Already we are seeing more masks in stores and larger events being cancelled. While the economy might not be locked down as it was early last year, a cautious consumer does not paint a picture of a burgeoning recovery.
On the other hand, if vaccinations rise due to the surge and Delta’s effects are short-lived, the momentum is less likely to be interrupted. Either way, we still have a long road to travel before we reach the employment levels we saw before the recession hit. Plus, supply constraints are likely to stay with us for the near term. These constraints contribute towards our “transitory” inflation. The answer? The market might be turning, but we don’t know in which direction. Either way, we are not expecting a sharp turn.