‘Consumed’ by inflation | Nasdaq

By Kevin flanagan, Head of bond strategy

The ‘word of the week’ in US financial markets last week was clear “inflation. I know I wrote a blog on inflation last week, but how can I not approach the 800-pound gorilla in the room? In the two April CPI and PPI reports, the Bureau of Labor Statistics appeared to use language like “greatest increase / advance since …” on several occasions. It will grab everyone’s attention!

What struck me as interesting at the end of the week was “the state of the consumer”. In the wake of the inflation fireworks, markets have received two different reports that are directly related to the consumer sector of the economy: the retail sales and the University of Michigan consumer surveys. .

Each of these versions contained something remarkable. Let’s take a look at the Advance Retail Sales report first. After March’s revised upward push of + 10.7%, April’s result was unchanged. This lower than expected performance appears to reflect some “clawback” from the positive effects of the $ 1,400 stimulus checks issued in March, as well as some of the initial positive effects of the economic reopening. (FYI, this last point was also evident in the IPC report.)

Advanced retail sales

Figure 1_ Advanced retail sales

But does this mean that consumer spending has stagnated? Not in our opinion – more than likely it’s just a break. In fact, investors may have to get used to uneven monthly figures over the next several months from a variety of economic indicators. Remember, we are in uncharted territory here. What is arguably the most important is the dollar level of retail sales. As the graph clearly illustrates, consumer spending has more than surpassed its pre-pandemic level, as overall retail sales are now at $ 94 billion, up 18% from their February 2020 total.

You didn’t think I forgot about inflation, did you? Now let’s move on to consumer sentiment. Unexpectedly, consumer confidence actually fell during the first half of May. However, this was not due to renewed fears about economic growth, but rather the direct result of higher inflation fears. Once again, investors witnessed inflation-related numbers that highlighted references “to ten years or several decades.”

Conclusion

I’m sure I’m not too excited about a month’s data. However, inflation fears have a way of sometimes becoming a self-fulfilling prophecy. In other words, if consumers expect higher inflation, they can adjust their spending habits accordingly. Against this backdrop, reports such as the upcoming CPI will more than likely take on increased importance and may have the potential to change the outlook for the Federal Reserve (Fed) bond market. Stay tuned…

Originally published by WisdomTree, 05/19/21

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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