Never underestimate the US consumer’s willingness to spend. And from mine, that’s been the story of this year. Consumers have used whatever means available to spend, spend, spend. With ~70% of US GDP consumption based – that has also meant the economy managed to keep its head above water. But what does it look like going forward?Do consumers still have ultra-strong balance sheets to keep it up? And are rates eventually going to bite? I ask this because if US consumers are closer to maxing out their credit cards (with more than $1T in debt)… the odds of a recession sharply increase.
"Inflation"
Fed Can Keep Raising w/Core CPI 4.8% YoY
The market celebrated the June monthly CPI data. Headline CPI came in at just 3.0% YoY – and Core CPI fell to 4.8% YoY. Good news. However, with Core CPI still more than 2x the Fed’s target – expect them to raise rates again at the end of the month. However, what surprises me is the market believes the war with inflation is basically done. Is it? I think that is presumptuous. The fight with Core inflation will be a long one. If correct, the Fed may not need to keep raising rates aggressively – however are likely hold them there until their objective is met.
Some Things Just Take Time
This week we received the latest monthly payrolls data. US employers added 209K jobs – a little lower than expected. However, the job market appears robust. One metric that deserves closer inspection are weekly hours worked. That is trending lower and could be a precursor to what’s ahead. From my perspective, what we’re seeing is the “Fed lag” effect of higher rates slowly tighten its vice. But these things take time and we may not see the full effects on the labor market for another 6-12 months (at a guess).
‘Higher for Longer’ after May Core PCE
May’s print for Core PCE came in 4.6% YoY – still well above the Fed’s objective of 2.0%. However, mainstream were quick to label the report as ‘lackluster’. Why? Here’s the thing – Core PCE has hardly changed the past few months. It dipped in May to 4.62%, from April (4.68%), but was above March (4.61%), and was exactly where it had been in December (4.62%). Put another way – we have made no ground since December – and yet it was now somehow ‘lackluster’. But it gets better: core services inflation (without energy services) rose by 5.4% in May YoY. It was fractionally lower than April (5.5%) – but equal to what we see in both March and December (5.4%). Similar to Core PCE – it too is stuck in a tight range for 5 consecutive months. What does all this mean? Simple: rates will be higher for longer and markets don’t get it.
For a full list of posts from 2017…