• Markets were in a good mood overall this week, despite no deal in Congress on the next round of assistance. The big political news was Biden’s historic VP pick. With 81 days until the election, the race is on!
  • Inflation bounced back more quickly than expected in July, as pandemic related discounting rolled off. Core inflation at 1.6% year on year, remained unthreatening.
  • Retail sales continued to improve, albeit by slightly less than analysts were expecting. The big increases due to pent up demand from the closures are in the past, but progress is still being made.



Markets Optimistic Despite No Deal Yet from Washington

Financial News- Many Retailers Are Above Pre-Pandemic Sales Markets were in a good mood this week, despite the lack of agreement on the next round of assistance from Washington. July data continued to roll in, with inflation bouncing back and retail sales continuing to make progress. The big news was Joe Biden selecting his running mate, Senator Kamala Harris. The choice is historic, but likely not a game changer from a policy perspective. Biden’s stance on many issues was set before Harris was chosen, and it is unclear how much influence VPs have on the campaign’s priorities, and it is still a bit early to see if the pick has improved Biden’s odds in the polls.

On the economic data for July, inflation, as measured by the Consumer Price Index, rebounded more sharply than expected. Core inflation rose 0.6% month-over-month – the largest jump since 1991. The move was largely due to price hikes in areas that had seen significant discounting earlier in the pandemic, like motor vehicle insurance and airline fares (spending categories that also experienced steep declines in sales volumes). The acceleration in price growth has led some to raise the specter of stagflation – where higher inflation takes hold despite low growth. However, we think its bit early for that, given some of the volatility in various categories recently. Core inflation was up a modest 1.6% year-on-year in July, so there is still room for prices to normalize further before inflation gets anywhere near a level that is concerning for the Federal Reserve.

Retail sales continued to improve in July, rising 1.2% on the month. They came in below what markets were expecting, but even in the face of surging infections in many areas of the country, retailers continued to make progress. The pace of the rebound has slowed, now that the initial flurry of pent-up demand after the closures has played out. Many of the major categories are very close to or even above their pre-pandemic level of sales (Chart 1). The hardest hit categories are clothing, restaurants and bars and department stores. Restaurants and bars among the later businesses to open, and in some areas face renewed shutdowns. And demand for clothing is likely low, given many people are staying home in their sweatpants, (it has also been hit by the shift to online retailers).

Financial News- Initial Jobless Claims ImprovingProgress on sales is likely to slow further in the months ahead, particularly now that the generous unemployment benefits ($600/week) have ended. The good news is that initial jobless claims continued to move in an encouraging direction in the week ended August 8th (Chart 2). Moreover, the number of people collecting unemployment benefits also declined in late July. Still, at 28.3 million people, the total remains incredibly high.

This tally underscores the need for assistance from Washington. Many states’ unemployment benefit rates top out at very low levels: Florida at $275 per week and Arizona at $240 per week. Trump’s executive order funds $300 per week out of FEMA disaster relief funds. But that will likely only last about six weeks. Congress needs to act on another round of relief, particularly for state governments to forestall another round of layoffs at the state and local level which would weigh on growth over the medium term, similar to the dynamic as we saw in the 2010-2012 period.

Leslie Preston, Senior Economist | 416-983-7053

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