Daily Update: July 16, 2021

Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy.

The U.S.’s economic recovery is improving, but inflation and soaring prices remain considerable risks. 

“The U.S. economy continued to strengthen as mobility trended upward in the second quarter, despite slowing vaccination rates and the rise of the delta variant. Meanwhile, the growth in housing-related activity has eased and the reopening has brought about consumer spending shifts to services from durable goods,” S&P Global Ratings Chief U.S. Economist Beth Ann Bovino said in recent research. “The labor market remains on the mend as services get back to full capacity, with real-time data indicating solid U.S. job gains this July.” 

Credit conditions and overall capacity for industries across the North American region—spanning autos, capital goods, consumer products, healthcare, media and entertainment, oil and gas, retail and restaurants, technology, transportation, and beyond—are largely stabilizing and improving.

But even as the world’s largest economy continues to rebound in what Dr. Bovino described as “a sweet spot,” the Consumer Price Index jumped 5.4% year-over-year from June 2020 to June 2021, marking the largest increase in 13 years, according to the U.S. Labor Department.

“While the base effects from the pandemic are fading from annual price inflation (as the impact from pandemic-depressed prices filters out of the system), the large seasonally adjusted month-over-month inflation prints for the past three periods point to a hefty near-term boost in prices across many sectors, driven by supply and labor bottlenecks catching up to the reopening's demand surge,” Dr. Bovino said in her report.

Federal Reserve Chairman Jerome Powell subsequently downplayed the incredible increase, stating that the price increase won’t derail the country’s post-pandemic recovery nor effect monetary policy in the near-term and characterizing the boost as temporary and caused by “base effects” from the deep declines in prices prompted by last year’s lockdowns, according to S&P Global Market Intelligence. During a July 14 House Financial Services committee hearing, the central banker told Congressional leadership that while "inflation has increased notably and will likely remain elevated in coming months before moderating," the increase in inflation has been "in a range that is broadly consistent with the [rate-setting Federal Open Market Committee's] longer-run inflation goal" of inflation expectations anchored at 2% and "we should look at this as temporary.”

U.S. government bond yields have tumbled so far this month, which have pushed recent equities rallies forward. The sharp decline may be linked to investors’ perceptions that U.S. economic growth has peaked for this cycle and anticipation that the Federal Reserve will eventually pull back on its bond purchases.

Today is Friday, July 16, 2021, and here is today’s essential intelligence.

Uncertainty in the Global Economy 

Emerging Markets Monthly Highlights: Faster Vaccination Pace Still Not Sufficient to Beat the Pandemic

GDP data for Q1 is clear evidence of this trend, surprising to the upside in several EMs, mainly due to stronger-than-expected domestic demand, and in many cases, activity in services, even as new daily COVID-19 cases reached new record highs at that time in some countries.

—Read the full report from S&P Global Ratings

Indonesia's COVID-19 Struggle

A COVID-19 resurgence is exacerbating downside pressures for Indonesia's economy and credit conditions. S&P Global Ratings believes a delayed economic recovery will drag on revenue for banks, most corporate sectors, and the government budget. Existing credit buffers on ratings will be chipped away if ongoing lockdowns are prolonged.

—Read the full report from S&P Global Ratings

European Mobility Edges to Post-Pandemic High Despite Rising Delta Infections

Oil demand markers in France and Italy improved sharply in the week to July 11, pulling up the average in Europe's biggest economies despite the Delta variant driving up infection rates and a number of countries reviewing travel and further reopening plans.

—Read the full article from S&P Global Platts

South Africa Protests May Disrupt Supply Chains for Lenzing, Mahle

Political protests in the city of Durban, South Africa, have widened into the burning of warehouses, Reuters reported, and have led to factory closures, according to The Economist. Container line A.P. Møller - Mærsk A/S has also shut some of its facilities in the city. The disruptions may have an onward impact on supply chains connected to Durban, and potentially South Africa more broadly.

—Read the full article from S&P Global Market Intelligence

Market Dynamics

Latin American Equities Post a Strong Second Quarter, as Economic Activity Starts to Bounce Back

What a difference a year makes. Latin American equities had a strong Q2, outperforming most regions, as the S&P Latin America BMI gained 15.7%. As of June 2021, the index had its best 12-month return since June 2007, gaining 46.6%. More than a year after the COVID-19 pandemic wreaked havoc on the global economy and public health, the S&P Latin America 40 was one of the best regional performers, up 51% for the one-year period ending in June.

—Read the full article from S&P Dow Jones Indices

Banking Industry Under Pressure

A Little More Clarity, A Little Less Gloom: An Update on Our Bank Credit Loss Forecasts

As the COVID-19 pandemic shows early signs of coming under control across large parts of the world, the policy responses to its economic consequences are starting to unwind, so far in an orderly manner. In turn, the effects of the pandemic on banks' asset quality are becoming a little less uncertain and a little less negative compared to S&P Global Ratings’ February 2021 forecasts.

—Read the full report from S&P Global Ratings

Industry Report Card: Japan Regional Banks Face Drawn-Out Profit Recovery

Large government stimulus helped Japanese regional banks we rate deliver better-than-expected financial results in fiscal 2020. However, their profitability will take a long time to recover because declining earning capacity remains unresolved and increased credit costs are likely to continue. S&P Global Ratings may downgrade those that fail to enhance their revenue and expense structures, leading us to view their business bases as relatively weak.

—Read the full report from S&P Global Ratings

Danish Banks Raise Profit Expectations for 2021, but Earnings Lack Quality

As banks across Denmark raise their profit expectations for 2021, analysts warn that it is too soon to celebrate the end of the coronavirus crisis, arguing that the improved earnings lack quality and are largely the result of temporary drivers.

—Read the full article from S&P Global Market Intelligence

ESG in the Time of COVID-19

Global Green Bond Sales May Set Record In 2021 on Europe's Sustainability Push

Global green bond sales are expected to recover and may set a new record this year led by Europe, which on July 14 announced an ambitious plan to reduce its net greenhouse gas emissions by at least 55% over 1990 levels within this decade.

—Read the full article from S&P Global Market Intelligence

An Offshore Wind Heavyweight, UK Squares Up to 'Tough' 40-GW Target

Having pioneered offshore wind for more than two decades, installing more than 10 GW in its waters to date, the U.K. now finds itself at a pivotal moment as it shoots audaciously for an almost fourfold increase in capacity by 2030.

—Read the full article from S&P Global Market Intelligence

Tough Road Ahead for EC's Decarbonization Plans: Platts Analytics

Europe faces a tough challenge in meeting its revised 2030 target to cut greenhouse gas emissions by at least 55% below 1990 levels, S&P Global Platts Analytics warned in a report July 14.

—Read the full article from S&P Global Platts

Democrats Reach Budget Deal That Could Pave Way for Aggressive U.S. Climate Action

Key U.S. Senate Democrats agreed to a $3.5 trillion budget resolution that party leaders said will support President Joe Biden's efforts to address climate change.

—Read the full article from S&P Global Market Intelligence

Selling Conventional Permian Assets May Help E&Ps Meet Financial, ESG Goals: Analysts

Selling conventional Permian assets, for upstream companies that still own them, might not only be a way to monetize assets with dwindling production that may now be non-core for majors or large independents, but also satisfy climate-change goals, analysts said.

—Read the full article from S&P Global Platts

Cyber Risk In A New Era: The Increasing Credit Relevance of Cybersecurity

Given the increasing sophistication of cyberattacks over the past 12 months, cyber risk is a more relevant topic than ever before.

—Read the full report from S&P Global Ratings

The Future of Energy & Commodities 

Infographic: Marine Fuel Price Outlook Sets Stage for HSFO Growth

With the premium for very low sulfur fuel oil (VLSFO) over high sulfur fuel oil (HSFO), known as the Hi-5 spread, looking set to remain above $100/mt, the demand for exhaust gas cleaning systems, or scrubbers, has a bright outlook. This will boost HSFO's share of the oil-based bunker demand through 2030, S&P Global Platts Analytics forecasts.

—Read the full article from S&P Global Platts

OPEC Sees Tight Oil Market Through End-2021, Solid Demand Growth for 2022

OPEC continues to project robust oil demand growth in the second half of 2021, providing the producer bloc and its allies a reason to boost supplies as the world recovers from the pandemic.

—Read the full article from S&P Global Platts

Industry Top Trends Update: Oil and Gas North America

OPEC has remained supportive during the pandemic; however, any disagreements or a renewed focus on gaining market share could disrupt oil prices. Global demand has made a nice recovery but the virus and its mutations are still concerns. Any mutation that could evade the benefits of vaccines could result in a significant drop off in demand. How long will shale producers demonstrate production restraint? A sustained level of very high oil prices could sway investor sentiment and result in producers substantially ramping up production.

—Read the full report from S&P Global Ratings

Written and compiled by Molly Mintz.