Stocks coming week: Delta variant is another headache for the Federal Reserve

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The highly contagious Delta variant of Covid-19 is racing across the world, causing a shortage of workers in the UK and increasing stress on the struggling global travel industry. Delta now represents 83% of samples sequenced in the United States.

Fears about the variant’s potential damage briefly scared investors last week, causing stock prices to drop sharply on Monday. Investors were already worried about inflation, which could force the US central bank to withdraw support for the economy sooner than expected.

We will hear on Wednesday whether concerns over Delta have also infiltrated the Federal Reserve’s Open Market Committee. The Federal Reserve will provide an update on its monetary policy at 2 p.m. ET, followed by a press conference with President Jerome Powell at 2:30 p.m. ET.

The central bank should not change its policy. Instead, investors will be listening for clues about the strength of the economic recovery and how the Federal Reserve is looking at the future of its stimulus packages.

What policymakers think about inflation is crucial. The US consumer price index jumped 0.9% in June, the largest one-month increase in 13 years. Over the past 12 months, prices have risen 5.4%, the largest annual increase in inflation in nearly 13 years.

Powell has always said he expects inflation to moderate. But the pressure on the central bank is mounting, with some economists saying the Fed is expected to start cutting its bond purchases later this year in anticipation of interest rate hikes that would help contain price hikes.

Delta makes these decisions even more difficult.

Another increase in coronavirus cases could prevent struggling supply chains from returning to normal, which in turn would keep pricing pressure on. At the same time, Delta could blow the recovery a bit, leading to lower demand and also reducing the pressure on prices.

In the UK, where Delta is driving a sharp rise in coronavirus cases, there is already evidence of the former. Supermarkets in some areas ran out of selected products last week and some gas stations dried up after hundreds of thousands of workers were forced to self-isolate due to the virus.

“The Delta variant could shut down other developed economies and China. It could disrupt already fractured supply chains, putting another drag on economic growth,” said Dan North, senior economist at the insurer. Euler Hermes.

In short, the variant brought more uncertainty.

Some economists believe this will only affect a handful of industries in the United States, where widespread foreclosure restrictions are unlikely to be imposed again. Others fear that Delta will delay restarting in-person schooling and thus derail the job recovery.

Economic balance

US investors will also be entitled to a check on the economic situation next week.

The first reading of gross domestic product, the broadest measure of economic activity, will be released Thursday at 8:30 a.m. ET. Economists polled by Refinitiv predict that the US economy grew at an annualized rate of 8% between April and June, up from 6.4% in the first quarter.

But there are signs that the recovery may not be as strong as some had hoped.

IHS Markit lowered its global growth forecast for 2021 by 0.2 percentage point to 5.8% last week. At the same time, IHS cut its growth forecast for the United States in 2021 from 7.4% to 6.6%, mainly due to lower spending by consumers and businesses in May.

“The recovery remains on solid footing due to an almost complete revocation of pandemic containment measures, expansionary fiscal and monetary policies and the restocking of depleted stocks,” IHS said.

IHS expects inflation to prompt the Federal Reserve to reduce its asset purchases later this year and raise the federal funds rate in 2023.

next

On Monday: Sales of new homes in the United States; Profits from LVMH, Lockheed Martin and Tesla

Tuesday: US consumer confidence; Earnings from 3M, General Electric, UPS, Apple, Google Parent Alphabet, Microsoft, Starbucks and Visa

Wednesday: Profits from Boeing, McDonald’s, Facebook, Qualcomm, Nissan, Barclays, Deutsche Bank and Rio Tinto

Thusday: US second quarter GDP; Benefits of ArcelorMittal, Comcast, Merck, Northrop Grumman, Samsung, Nestlé, AB InBev, Volkswagen, Shell, Total, AstraZeneca, Credit Suisse and Airbus

Friday: United States personal income and expenses; Benefits from IAG, Renault, BNP Paribas, Caterpillar and Exxon Mobil

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