What If God Was One Of Us

Inflation data out of the US will dominate headlines in the week ahead, but it’s not the only thing on the docket.

On the data front in the world’s largest economy, investors and traders will also get NFIB and retail sales, both of which are critically important.

Small business optimism, like consumer sentiment, has rarely been worse. A gauge of small firms’ outlook is loitering near a record low, and consensus expects another headline print near levels seen during the onset of the pandemic. An in-line reading would mark the sixth month below the 48-year average.

Increasingly, American consumers and businesses are prone to adding “inflation” to the inventory of life’s certainties, a list which previously included just two things: Death and taxes. Inflation is the number one concern of small businesses.

Following Wednesday’s CPI report and Thursday’s PPI data, markets will get retail sales for June. Sales “unexpectedly” (and the scare quotes are there for a reason) fell in May.

Any evidence to suggest consumers are retrenching would add to recession concerns. A negative read on real personal spending for May pushed a key real-time indicator of current quarter GDP into contraction territory late last month, and time is running short for the data to rule out a technical recession.

Unfortunately, an upbeat read on retail sales could conceivably be even worse for risk assets than another lackluster report, especially if June’s inflation data comes in hot. The more resilient the consumer, the more inclined the Fed will be to push the issue. A steady labor market and robust spending in the face of 9% inflation screams for rate hikes.

Markets will have an hour and a half to digest Friday’s retail sales data before the University of Michigan releases the preliminary read on consumer sentiment for July. Economists expect another record low, which will either validate slower spending or be juxtaposed against it.

More important, perhaps, than the sentiment gauge itself will be an update on consumers’ inflation outlook. An uptick in longer-term expectations in the preliminary survey for June helped cajole the Fed into the largest rate hike since 1994. In the final read on the June vintage, the offending print was revised lower (from an initially reported 3.3% to 3.1%). Gas prices have fallen recently, which ostensibly argues for a more benign read (figure below).

Note that this is severely vexing for average families. Depending on household composition (i.e., how many children there are) gas can be a twice- or even three-times-weekly purchase. And gas isn’t like grapes, for example. If you have three kids who all love grapes, you might buy grapes three times per week too, but a 50% increase in grape prices just means you’re spending $18 per week on grapes instead of $12. A 50% YoY rise in gas prices can mean spending $150 a week on gas instead of $100.

Given that, it’s little wonder that gas prices and consumer sentiment tend to move together. “The damage done to household balance sheets by elevated fuel costs and the erosion of discretionary spending potential is evident,” BMO’s Ian Lyngen and Ben Jeffery remarked. “This is a telling divergence given the strength of the labor market, growing wages and a surplus of job openings,” they added, calling inflation “the only variable that matters at present.”

The figure (above) is straightforward. A straight up rise in fuel prices has been associated with a straight down trajectory for forward-looking consumer sentiment. “Even if core CPI begins to moderate, the realities of the supply issues in oil will continue to buoy headline to the detriment of confidence,” BMO’s Lyngen went on to say.

For the Fed, that’s very problematic. As Jerome Powell was keen to point out during last month’s press conference, what matters to everyday people is headline inflation — gas and food. And the Fed’s capacity to engineer price decreases for either is severely limited.

“Regular people… they don’t know what ‘core’ is. Why would they?” Powell wondered, aloud.

In response, Bloomberg’s Michael McKee asked if the Fed was willing to “chase” headline CPI. “We’re responsible for headline inflation. That’s law,” Powell conceded, before underscoring the Committee’s dilemma. “We can’t affect commodities [but] we have to be mindful of food and energy prices.”

In that respect, Powell, who Senator John Kennedy called “the most powerful man maybe in the world” during an asinine exchange last month, is just like average Americans: Unable to affect food and energy costs, but compelled to obsess over them anyway. God, it would seem, is one of us after all.