Equities finished lower on Friday, bringing the S&P 500’s streak to five consecutive down days, as simmering worries about the economic impact of the Delta variant continue to drive investor sentiment.

The energy and materials sectors, along with small-cap stocks, held up better on Friday, while benchmark Treasury yields ticked higher, suggesting the day’s move lower was less about increasing concerns of a cyclical downturn, and perhaps more a reflection of expectations for less stimulus, spurred by Friday’s hotter-than-expected wholesale inflation report.

The August read on producer prices showed a 0.7 percent increase versus July and an 8.3 percent jump over the past year, the highest in more than a decade.

A sizable contributor to the increase was health, beauty and optical goods, while transportation and warehousing input costs rose at a modest rate.

Overall, this is consistent with the current spate of higher consumer-price inflation, with higher producer (input) prices reflecting ongoing bottlenecks, shortages and supply-chain disruptions.

We believe those will slowly begin to clear as we move into 2022, but this August PPI reading suggests inflation pressures are not subsiding quickly.

We maintain our view that inflation will recede as we advance, but will settle in at a higher rate than the previous cycle, supporting the case for the Fed to reduce monetary policy stimulus sooner rather than later.  

Markets continue to keep one eye trained on the September Fed meeting and the upcoming bond taper.

Persistently low bond yields and low equity-market volatility reflect expectations for ongoing Fed support, though there is growing consensus around the reduction of bond purchases commencing in the final few months of this year.

We are aligned with this view, though we’d note three elements of this Fed shift: 1. The wind-down of bond purchases will be gradual; 2. Economic and credit conditions have improved dramatically, so the catalyst for scaling back emergency monetary-policy settings is a virtuous one and shouldn’t shock the system; and 3. The taper represents a reduction in accommodation, not tightening that would undermine the expansion.

We still think rate hikes are more than a year away.

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