The remarkable consumer
A surprisingly strong economy could mean higher for longer, longer
All the talk of peak rates and elevated bond yields seem to ignore that in the last 60 years, the 10-year Treasury yield exceeded the inflation rate more than 80% of the time. Today, it sits about 100 basis points above CPI, low by historical standards. The average spread from 1962 to today is 200 basis points. Record issuance to feed record deficits (federal outlays and federal debt have jumped 50% in five years), geopolitical tensions and wars, and a Fed that keeps hammering its 2% mantra seem to leave little room for a big pullback in yields. Yet amid the worst bond bear market in decades, not one sell-side economist surveyed by Bloomberg is forecasting a 10-year above 5%—a level hit in overnight trading last night! The next technical resistance is 5.30%, the peak in 2007. Strategas Research’s experience has been everyone gives up near a low, when apathy and indifference reign. Is that where we are with bonds? In my advisor meeting this week in Punta Gorda, Fla., there was great frustration. An advisor asked me what I would feel comfortable recommending for 12 months. He said that if a new customer sees a red statement for the first year, the advisor will lose that customer. Another advisor thinks fed funds are going to 8%. I wouldn’t say this is apathy! A dinner meeting with advisors was more upbeat. Could have been the meals. Scrumptious! The head chef has a home near Taylor Swift’s Rhode Island holiday house and purportedly has cooked breakfast for her. Indeed, one of the advisors is a self-described “Swiftie.” Discussion centered around lavish Floridian parties, a landscaper who boasts owning 10 Airbnbs, a masseuse whose forex trading husband was previously a truck driver, and this will end badly!
The rolling recession that struck goods producers in early ’21 has ended, with the sector now enjoying a rolling recovery as reflected in this week’s retail sales report (more below) and increases in industrial production. Consumers are shopping with gusto, and increasingly on stuff. “They’re not about to retrench as some hard-landers expect,’’ Yardeni Group says. The ex-auto inventory/sales ratio has turned negative, a big positive for future production, and the Atlanta Fed’s GDPNow estimate of real Q3 growth is now tracking at 5.4%! Also emerging from a recession are S&P 500 earnings, which may have hit a record high in Q3, along with revenues. Yet beneath the surface, equity sector dynamics send a more cautious signal. Month-to-date gains are concentrated among defensive equity sectors, a notable contrast from early summer’s broad rally led by deep cyclicals. Year-to-date performance continues to be massively dominated by the Magnificent Seven, which now account nearly half of the Russell 1000 Growth index, up from 12% 10 years ago. On the macro front, leading sectors such as temporary help services suggest a sharp slowing ahead in headline jobs growth, while surveys by the NFIB and University of Michigan point to job losses next year. The 12 regional Fed banks are reporting a similar disconnect between the soft and hard data. More support for wait and see.
While below shorter trendlines, the S&P remains above the 200-day moving average, with recent buying spreading to financials, small- and mid-caps, and transports. It’s still early in what historically is the best 3-month stretch for stocks, with energy and defense companies bid up on higher oil (more below) and the potential for broader and longer conflicts. Bond proxies (Utilities, REITs, Consumer Staples) are at panic bottoms, historically bullish (and typically consistent with a bottom in bond prices, though that’s not apparent yet). While higher-for-longer rates can be destabilizing, especially for banks, the evidence suggests this is getting overstated. For example, S&P forward estimates have recovered to all-time highs and are not pointing to negative consequences from higher borrowing costs. The U.S. debt-to-equity ratio has been improving for more than a decade, confirming today’s high debt levels may be supportable. Real GDP growth is far outpacing payroll growth, revealing a post-pandemic productivity-led boom. Payrolls continue to grow even without suspicious adjustment for seasonality and birth-death factors. And properly measured inflation (excluding volatile one-offs) already has more than returned to the Fed’s target. A too-hawkish policy error is still a concern, TrendMacro says. But it notes economic shocks only cause recessions when the economy is vulnerable. Thanks to the remarkable consumer, today’s is extremely strong. And therefore, higher for longer, longer.
- The consumer reigns supreme September’s “bombshell beat” in retail sales, as TrendMacro put it, was driven by a still robust jobs market and wage growth that slowed to a still healthy 5.2% pace. No mention of a drag from student loan repayments. While they don’t get fully underway until this month, the New York Fed estimates payment resumptions will only shave a tenth of a point off consumption as expanded income-driven repayment options and $127 billion in loan forgiveness lessen the impact.
- Another reason the Fed is likely done Used car prices are falling like a rock, with a mid-month update to the Manheim Used Vehicle Index showing prices plunging at a 38% annualized rate the first two weeks of October. New and used vehicles are the second-largest weight in CPI after housing, where the critical rent component has been softening and could be crushed in the year ahead amid booming supply.
- Global green shoots German sentiment rebounded sharply in October to a 6-month high on falling inflation expectations and an anticipated stabilization of short-term interest rates. The improvement helped lift eurozone sentiment to positive territory for the first time since April. To the East, Chinese economic data surprised to the upside, with Q3 GDP, industrial production and retail sales beating expectations, and unemployment unexpectedly falling to 5%.
- The mortgage math doesn’t work Existing home sales fell a fourth straight month in September, tracking toward their worst year since 2010. With 62% holding fixed mortgages below 4%, half the current market rate (highest since the ’90s), homeowners are staying put, keeping homes for sale at historic lows. New home inventories are hovering near 2-decade lows. Starts did rise a third time in five months in September, but other surveys show activity pulling back. With prices still elevated, choices limited and mortgage rates at 8%, many buyers are holding off. Mortgage purchase applications are at mid-’90s lows.
- A prolonged oil spike is unlikely That’s the view of JP Morgan, though it notes the Mideast turmoil and threats of expansion continue to feed volatility. Oil prices at this writing were topping $90 a barrel, their second straight week of increases in what typically is a seasonally sluggish period. The bank notes oil flows have yet to be affected by the conflict, and it sees limited risk of future supply losses. In the U.S., crude production is back at all-time highs above 13 million barrels per day.
- Super-size it Super-sized stimulus has not only driven up the cost of living, but the cost of “thriving,” researchers at American Compass say. Their estimate of the average annual costs for food, housing, health care, transportation and education for a family of four exceeded the median full-time income for a man 25 or older by 16% ($75,732 vs. $63,388) in 2022. The gap has ballooned from just 2% in 2018. This reflects what many may not appreciate, Piper Sandler says: inflation may be moderating but that’s off high absolute price levels that are destroying consumer sentiment and worsening their moods.
AI trumped crypto, now weight loss trumps AI! Deutsche Bank thinks favorable clinical trials of a weight-loss drug is behind the drop in a gauge of food & beverage stocks to 3-year lows, the decline in health & joint-replacement stocks (on fewer potential patients) and a lift to airline stocks on the possible lower passenger weights. There’s also evidence the miracle drug lowers addictive tendencies. The bank sees the potential for a healthier, more productive population on widespread use once the price drops from its current $1,000 a month.
SALT away Media reports said House Speaker candidate Jordan told a handful of New York Republican holdouts that he would support doubling the state & local tax deduction (SALT) from $10k to $20k. With the reversion of the Trump tax cuts looming in 2026, Cowen & Co. thinks a SALT cap of $50k is more likely. If it comes to pass, it would mark an amazing finale to this year's script.
Another reason I should stick with wine Bank of America shares that climate change could make beer taste worse by 2050 because of a decline in hops yields and alpha acids that produce the bitters flavor.