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Macro Musings: The Delta flight stokes market turbulence

Despite an absence of market-moving data, it was a turbulent week for bonds and stocks. After a stunning drop in stock prices and bond yields early in the period, both staged a vigorous recovery and ended the week unscathed. Stock prices hit new records while bond yields ended the week virtually unchanged from the previous week. The volatile path of the health crisis ignited the market turmoil, as the Delta variant is spurring a rise in infections and raising growth concerns. So far, most state and local governments are taking a hands-off approach, believing the downside economic risk of taking action outweighs the health risk linked to the new variant. The doves among Federal Reserve officials may use the Delta risk as a reason to retain an extremely easy policy at the FOMC meeting next week. But the robust growth and more virulent inflation this year will likely push the majority into a less dovish camp. The inflation narrative is becoming more complicated, suppressing buying intentions for some households even as it produces more wealth for homeowners.

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