Morning Notes — Outlook

We’re seeing supply constraints because demand is so strong with the next major data point due this Friday with the release of April US retail sales.  The latest news outside the US showed a significant pickup in growth throughout Europe during March and April. Global export data has been very strong with global aggregate PMI hitting its highest level in 14 years.  We’ve been expecting price pressures, but now expect it to be more intense and more broad based.  Over the last month, metals prices are up more than 15% and agricultural commodity prices are up more than 20%.  Import prices in developed countries are rising at their fastest pace in more than 10 years and expect very strong US April import price data later this month.  You see it in labor costs as well with average hourly earnings up +0.7% in Friday’s April Jobs Report. Supply constraints created the disappointment in Nonfarm payroll adds.  We receive the US Job Opening data tomorrow (JOLTs) and expect to see 7.5M job openings, which if filled, would reduce unemployment to pre-pandemic levels. Companies are getting creative with an increase in the work week, hours worked and part-time workers moving to full-time status showing up in last weeks Jobs Report. However, supply constraints in places like auto production will also temper near-term Industrial Production data (this week) and other growth-related reports in the US and Europe, but only temporarily.  

The demand picture should keep you constructive on risk assets broadly with more conviction for reflation and reopening-linked themes within equities.  If there’s a surprise looming, its most likely to be on the inflation side.  After more than 12 years of disinflation, most investors are poorly positioned and markets will be slow to recognize a stronger than expected pickup in inflation.  The Fed has already said it won’t respond to these inflation pressures, pointing to a still-weak labor market.  But strong growth is eating up slack and the Fed will stand down until its undeniable.  While it’s still too early, this week’s economic calendar includes several inflation-linked catalysts including: 1) China CPI/PPI Tuesday morning; 2) US CPI Wednesday; 3) US PPI Thursday and; 4) US import/export prices on Friday with the retail sales data.