Thoughts From The Divide: Until It Isn’t
Last week, when talking about Powell’s assurance that “two percent is and will remain” the Fed’s target, we tossed in an aside of “till it ain’t” because while well-established routines are comforting, relying on them can put us offside (see our current favorite Twain aphorism). This week, with the saying that “the trend is your friend, until it isn’t” going through our minds, there is some evidence that a few important trends might be breaking down.
“Our estimate of excess savings for US households… is now fully exhausted”
The first trend that may be souring is that of the rude health of the US consumer. This has almost become a running joke, with the consumer (so far) bringing to mind another Twain misquote, “Reports of my death have been greatly exaggerated”. But perhaps this time, the consumer really is on its way out? According to JP Morgan’s Marko Kolanovic, who was admittedly “among market prognosticators caught flat-footed” by the rally in the first half of this year, the US consumer is now on shaky feet. As this article explains, the JPM analyst believes that “consumers have spent down the entirety of their excess financial savings from the pandemic”, and said, “we remain of the view that lower income cohorts are increasingly under pressure with fewer offsets and with little sign of relief from the high cost of capital environment”. In addition to needing to emphasize the word “excess” in all of the above, there seems to be an easy connection to a stuck clock being right twice a day. But Kolanovic’s overall thesis is anecdotally supported by the Fed itself. In the latest Beige Book, the initial summary noted that “Some Districts highlighted reports suggesting consumers may have exhausted their savings and are relying more on borrowing to support spending”. Note, however, that not only was this conclusion not unanimous, but other Districts saw spending “picked up modestly” or “grew steadily”. Meanwhile, the anecdata (FUD?) is in agreement, “with new warnings about consumers… from several retailers who said customers were already having trouble paying off their credit card debt”. These may be worth taking with a grain of salt. As this article notes, many retailers’ credit cards come with very high rates (Macy’s at 31.99%!), which implies an adverse selection, and “those higher interest rates, combined with more lax credit score thresholds, make it more likely that higher-risk consumers will sign up for store cards”. Sign up for = become delinquent on?
Other trends to watch:
With the recently announced Apple “ban”, China may be putting some teeth into the US-China relationship. At the risk of looking cynical, we can’t help but wonder whether the ban was at least partially related to Huawei’s new smart phone release. The phone is an indictment of the effectiveness of US sanctions and may be a little disconcerting for global semiconductor manufacturers as well as Apple’s senior management.
Also, while many might prefer to think that the fireworks of March are nothing but a rosy glow in the rear-view mirror (“have now been resolved”?), the trend repricing in financials is running headfirst into more discussion of the epic scale of CRE problems and a regulator-imposed requirement to raise an extra $63 billion. Hard to believe the appetite to lend will be unaffected.
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