In the week ahead, traders and investors will scrutinize results from a bevy of big-name retailers.
The stakes are high. Another spate of guidedowns like those seen last week would add to concerns about the vitality of the US consumer, who’s struggling under the weight of generationally high inflation.
The world’s largest economy lives and dies by consumption. If retail earnings do, in fact, suggest a “real-time downshift” is afoot (as one strategist put it last week), analysts will need to revise profit forecasts and economists may be compelled to rethink the popular narrative that says “excess savings” are sufficient to prop up spending while the Fed taps the brakes on the labor market.
On the data front, personal income and spending figures for April will help refine the consumer narrative. Retail sales were better than expected, but the numbers were quickly overshadowed by retailer guidedowns.
“The combination of durable goods and personal spending/income will further investors’ understanding of the pace of growth as the second quarter got underway — presumably with the conclusion that while there might be a lurking recession, it’s not going to be today,” BMO’s Ian Lyngen and Ben Jeffery said, adding that “the ongoing strength of the US economy remains a cornerstone for the Fed’s normalization ambitions and as such, confirmation that consumption remains robust will serve to put a floor in for front-end yields while any further erosion of risk asset valuations will translate into a bid for duration.”
That’s a bull flattener, assuming it plays out as described. 10-year yields come into the new week at their lowest levels in weeks, and multi-asset investors are certainly hoping bonds continue to cushion losses in risk assets. “There has been a shift in cross-asset correlations in recent days,” TD’s Priya Misra and Gennadiy Goldberg remarked. “US Treasurys reassert[ed] their safe haven status” last week, “the first time rates responded to a risk-off move in equities since late-2021,” they added.
As recession fears mount, it’s certainly rational to suggest bonds can once again serve as a hedge, but as I’ve said time and again since January, rates are an unruly beast in 2022. The figure (below) shows how 10s and 2s have behaved in May.
As Bloomberg’s Michael Mackenzie and Liz McCormick wrote, “the path of yields [last] week included jumps of 10bps for the 10-year and 14bps for the five-year in a single day, reinforcing expectations that the bond market will remain treacherous.”
Obviously, rates traders will watch April’s income and spending data closely for an update on PCE prices. Consensus is looking for another 0.3% MoM increase on the core gauge (figure below).
Remember: It’s the monthly prints that matter most for policymakers in the near-term. Declines on the YoY readings won’t be enough to dissuade the Fed from tightening aggressively. Both the headline and core CPI gauges topped estimates on a monthly basis in April’s report. If PCE prices follow suit, it’d be an unwelcome development.
In a worst case scenario, retail earnings are a repeat of last week, personal spending comes up short and PCE prices overshoot. There is no best case scenario. Or at least not one that’s realistic.
On the bright side, equities can probably bounce “just because” at this juncture. After all, the S&P fell into a bear market on Friday and probably would’ve closed there were it not for combustible conditions (e.g., lackluster liquidity and OpEx) conducive to the kind of manic reversals that are all too common this year.
Stocks have fallen seven weeks in a row, the longest such stretch in more than two decades. I’m loath to resort to nebulous clichés about dip-buyers, but sentiment is awful, flows are risk-off and positioning is very light (figures below, from Goldman).
There’s absolutely scope for a rebound, no matter how fleeting it’d almost surely prove to be. As a reminder, BofA’s Bull & Bear Indicator flashed an “unambiguous” contrarian buy signal last week.
Some of the rate hike premium has come out of markets over the past several sessions, and it was notable that Esther George nodded to equities during a CNBC appearance last week. Yes, she was prompted, and no, she didn’t indicate the Fed would be inclined to change course “because stocks,” but she didn’t dismiss equities out of hand either.
The May FOMC minutes won’t be much help for equities. As BMO’s Lyngen put it, “Wednesday’s FOMC minutes release carries with it a meaningful amount of event-risk, most of it hawkish.” Any indication that “some” members raised the prospect of bigger hike increments could be destabilizing.
“Bond yields are increasingly driven by risk sentiment and equities,” SocGen’s Subadra Rajappa remarked, suggesting we may be seeing the early stages of a return to the late-2018 trade, as bond yields retreat in the face of growth concerns and deteriorating risk sentiment. “Good news is now bad news for equities because of monetary policy normalization and bad news is bad news because of downside risks to growth,” she added.
Also on deck this week: New home sales, pending home sales and the final read on University of Michigan sentiment for May. Markets will hear from Bostic, George and Brainard, as well as Powell, who will deliver pre-recorded opening remarks for a conference in Nevada.
The idea of an equity rally being antithetical to the fed’s goals of tightening financial conditions has been discussed at length. Wouldn’t a duration rally also loosen financial conditions? Would the fed want mortgage rates or credit conditions to start dropping/loosening?