Themes From Washington as the Second Half Begins

WELCOME TO THE SECOND HALF: There’s no shortage of fascinating themes that will grip Washington and the markets in the second half. Here are some of the biggest ones:

1. Inflation: The bond market is acting as if the inflation threat is over, but there are warning signals on oil and wages. While prices for some commodities like lumber have come back to earth, oil seems poised to make a run at $80 per barrel as OPEC talks falter. And last Friday’s jobs report showed a 3.6% year-over-year hike in hourly earnings, which will rise further as employers desperately seek more workers.

2. All Eyes on the Fed: Every economic data point in the next few months will be viewed through the prism of the inevitable Fed tapering of asset purchases. With second quarter GDP likely to rise by 6% or better, a modestly less accommodative Fed is coming; the only issue is the timing. The Fed’s Aug 26-28 policy meeting at Jackson Hole could be crucial, preparing the markets for tapering by year-end.

3. The Covid Variant: It’s still doing enormous damage in several states where vaccinations have been lagging. There were about 10,000 fatalities last month, enough to give some people pause about returning to work, exacerbating the labor shortage. In vaccinated America, the economy is booming; in un-vaccinated America the virus has not been defeated.

4. Uncertainty in Washington: A bipartisan group of Senators has agreed to an infrastructure bill but the devil will be in the details. There’s no agreement on how — or whether — to pay for the bill; most Democrats are adamant that tax hikes should pay for even more spending. Passage of a basic infrastructure bill still seems likely by fall but a second measure, passed via budget reconciliation, will be difficult. More on this tomorrow . . .

5. Several other second half themes: Russian-sponsored hacking and ransom demands are in the news again today . . . The fall of Afghanistan, seemingly imminent as the U.S. abandons the existing government . . . The likelihood of massive fires and power outages in the drought-stricken U.S. West . . . Growing concerns about chaos in Kamala Harris’ camp . . . Dramatically more aggressive regulatory policies . . . New pressure on Stephen Breyer, 82, to step down from the Supreme Court so President Biden can nominate a younger judge.

THE BIGGEST SECOND HALF THEME for the markets obviously will be the economy, surging but not over-heating, boosted by remarkably low interest rates, plus even more fiscal stimulus and a Federal Reserve that’s not ready to raise rates for at least another year. There’s plenty to worry about, but fundamentals still look good.

Related: New Powers for Regulators

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.