All three major US indices closed lower for the shortened four-day week (7 – 10 September) due to the Labour Week holiday with the Dow down for the second week, by 2.2%; the S&P 500 off about 1.7% and the Nasdaq Composite giving up 1.6% after the poor employment report a week earlier as the persistent rise of Delta variant Covid-19 cases cast a long shadow in the markets.

With US equities rounding off their worst week in nearly three months on Friday, it was the same across the Atlantic pond with European stocks represented by the region-wide Stoxx 600 benchmark closing 1.2% lower for the week, its steepest decline slide since mid-August.

Adding to the concerns of a pause in economic growth due to the virus which has seen hospitals in some US states running out of ICU capacity, there are also worries of inflation which may lead to a pullback by the Fed as well as its European counterpart easing on loose monetary policies which had supported the buoyancy in equities markets.

The Fed will kick off its monthly two-day committee meeting on 21 September which will be eyed by investors for update on its bond purchase programme. The European Central Bank (ECB) has left its monetary policy unchanged for the moment but had said on Thursday that it will slow the pace of its asset purchases in light of rising inflation pressures on the continent.

The producer prices index (PPI) for August released on Friday showed wholesale costs for businesses up by 8.3% on annualised basis, its biggest advance in a decade. The PPI was up 0.7% month-on-month, exceeding poll estimates of 0.6%.

Much of the worries over inflation are already surfacing in Europe where there is pressure on factory prices in the wake of a logistics crunch in supply chains and anticipation in consumer demand for durable goods from cars to furniture when more economies reopen.

Across the globe, companies like IKEA, General Electric and businesses in Singapore have already complained of rising prices in raw materials from higher freight rates following port shutdowns in China from Covid measures and shortage of truck drivers among the many factors causing delivery backlogs which will likely stretch into 2022. Some market watchers foresee more of such warnings ahead of the third-quarter earnings season.

As the Financial Times (FT) had noted this week – nearly half of EU rubber, machinery and computer producers, and most electrical equipment makers are facing supply shortages with almost 60% of carmakers impacted. A survey of German businesses found 83% reporting price increases or delivery problems for raw materials, intermediate products and goods in August. Such constraints would hamper exports and hence delay the rebound in recovery growth.

Meanwhile, a poll by FT and the University of Chicago of 49 economists had just over 70% predicting the Fed will raise rates by at least a quarter of a percentage point in 2022 with almost 1 in 5 expecting the move to come in the first six months of the year.

Other data to be released in the shortened trading week due to the Labour Day holiday on Monday include weekly mortgage applications, second-quarter services and wholesale trade while a parade of Fed presidents will also be speaking at events this week including the Dallas Fed Town Hall.

That’s why the US consumer price index (CPI) for August to be released on Tuesday as well as retail sales, consumer sentiment and import prices later in the week will be important to gauge whether demand will reduce or add to inflationary worries. Other US data for the week include the jobless claims, industrial production and the Philadelphia Fed survey which looks at manufacturers’ outlook for northeastern USA.

US President Joe Biden has meanwhile raised the ante on getting more Americans vaccinated via mandates for federal employees and private businesses with more than 100 employees (or option of weekly tests for the latter) which has already generated pushbacks from Republican opponents. There is also the matter of the US debt ceiling looming ahead between the White House and US Congress on how to fund the US government though it is likely that Republicans will blink first in such a stand-off and test of political wills.

Some market strategists expect some pullback during the typically choppy September and October period with the topsy turvy turns hinging on catalysts ranging from Fed-speak (especially if it turns hawkish), guidance for forward earnings as well as surprises on the data front especially PPI, CPI and consumer sentiment.

Key data out of the Asia-Pacific will include China’s August money supply and loans data; industrial production (Bloomberg estimate 5.8% y/y from 6.4% in July), retail sales (Bloomberg estimate 7% y/y from 8.5% in July), surveyed jobless rate (unchanged at 5.1% from July) and home prices; India’s August CPI, trade data for Indonesia and India; and Australia’s 2Q house price index and employment report for August.

Enthusiasm for Chinese stocks has fallen sharply amid the current political and economic evolution under the new, egalitarian “Common Prosperity” approach towards managing the world’s second largest economy. The efforts to level the socioeconomic landscape have however also wiped off some $1 trillion from Chinese tech stocks alone with online gaming the latest to come under regulatory review and crackdown.

Cathie Wood who helms Ark Invest has notably said that it had significantly pared its exposure to China. It is likely that some of the focus among institutional investors will now shift to other Asian markets, especially to countries – such as Japan, India, Malaysia – who have stepped up their vaccination rates and Delta containment measures to pave way for economic reopening.