by Franklin J. Parker, CFA
The Summary
- The big news in markets at the moment is last week’s inflation print, which was much higher than expected at 6.2% year-over-year. Everything was a contributor, but energy (+30%), used cars and trucks (+26%), durables (+13%), and food (+5.3%) stood out. Clearly, these levels of inflation are concerning, and it is sure to draw the attention of the Biden administration. As we have talked about here before, there is a growing worry that the Fed simply does not have the tools to fight runaway inflation like they did in the 1980s. Investors should watch data in the coming months very carefully. If inflation begins to abate, this all may be a false alarm. If it continues to increase, then Fed reactions will need to be anticipated. Last week’s treasury auction also indicated that markets may finally be capitulating to higher inflation. The 10-year US Treasury yield spiked from 1.46% to 1.59% on Wednesday, and has now climbed above 1.6%.
- This week is a fairly quiet week in data. Retail sales post tomorrow and initial jobless claims post on Thursday. Jobs have been a curiosity lately. On the one hand, job openings are at an all-time high, yet the labor-force participation rate (the number of people looking for or who are in jobs, relative to the population) has continued to fall. Exactly why people are choosing not to work is an ongoing debate. For investors, this gives reason to believe that supply shortages may continue as companies struggle to fill positions and deliver goods and services, which, of course, further drives inflation but also slows economic growth.
- My thesis has been that markets likely have until early summer of 2022 before a significant pullback. With inflation running much hotter, my timetable may get pushed into the spring of 2022. The Fed may need to taper more quickly than originally anticipated so that they can raise interest rates more quickly than previously thought. This could put markets repricing interest rate hikes sooner rather than later. At any rate, investors should watch for developments here with eagle eyes.
The Details
Consumer spending data posts this week. Investors will be watching this data quite closely to see how consumers are coping with higher prices and the end to pandemic-era stimulus. To date, consumers have largely shrugged off higher prices, choosing to maintain and slightly increase spending. Some of that, however, may be due to increased savings from stimulus checks (and rent breaks, and student loan payment suspensions, etc). It is estimated that most of that savings would be depleted by the end of December, however, so some consumer demand may wane in anticipation of lowered savings levels.
And, of course, the Christmas shopping season is also upon us. There is talk that consumers are planning to front-load their Christmas shopping in anticipation of shortages in gift items. Again, fewer goods to sell means retailers may struggle to grow spending over last year at levels that would otherwise be expected, so this is one way supply shortages (and labor shortages) can curtail economic growth.
These monthly data releases—inflation, consumer spending, and employment levels—are becoming more and more important as a gauge for economic activity. Watching these signals closely will help inform the pace of Fed activity, as well as help to forecast earnings in the coming quarters. Disappointing consumer spending would likely yield disappointing Q4 results for many S&P 500 companies.
Chart of the Week
Fathom consulting pushed out an interesting chart this morning. As it turns out, most countries with a per capita GDP of at least half the US are democracies. The plot below shows how democratic a country is on the x-axis and its per capita GDP relative to the US on the y-axis. China is highlighted in blue. With “the great decoupling” under way, analysts are warning that Chinese growth may not be the bet it used to be. Stacked on top of that is the centralized economic control exerted by the CCP. Without a more liberal economy, the Chinese state-capitalism model may be put to a real test.
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