You can’t pass higher energy input costs on to households when consumer sentiment’s the worst in half a century and workers worry their jobs are at risk from AI replacement.
That was one (among many) messages from BofA’s Michael Hartnett who, in the latest installment of his popular weekly “Flow Show” series, noted that Donald Trump’s single-issue approval rating on inflation is now at a new low south of 33%.
The figure below gives you some context for the extent to which a near record-breaking one-month surge in energy costs made a bad situation worse for Trump.
In a Reuters/Ipsos poll conducted in late March, Trump’s approval rating on inflation hit an all-time low at just 23%. That for a president who ran in part on a platform to “fix” his predecessor’s inflation “disaster.”
If you ask Hartnett, the combination of inflation frustration and job jitters will ultimately limit consumer price increases, which is to say curb corporate pricing power. A corollary says higher energy costs will crimp margins and thereby limit profit growth.
“Both CPI and EPS expectations [may] peak in Q2,” he said, on the way to making a series of quasi-calls (Hartnett’s “calls” aren’t official, they’re more musings). Two-year US yields “won’t break 4%, the 2s30s will bull steepen to >140bps and the DXY index will make new lows below 96,” he wrote.
It follows that Hartnett thinks market pricing for the Fed trajectory’s way too hawkish even as we’re ~25bps (i.e., one quarter point cut) off the extremes in late-March, when traders were briefly pricing better-than-even odds of a hike by year-end.
The three annotations on the right-hand figure show you “max dovish” (~125bps of cuts priced), “max hawkish” (nearly 20bps of tightening priced in late-March) and current pricing (~5bps of cuts). The figure on the left’s another illustration of Main Street angst.
“The macro says cuts not hikes,” Hartnett said, suggesting the paltry 5bps of easing priced into STIRs will likely undergo a significant dovish reset in the months ahead.
And it’s not just the prospects of a dovish Fed, below-feared inflation, EPS growth downgrades and a faltering US economy that prompted Hartnett to lean bearish on the greenback.
“Threats to end NATO [and] OPEC petrodollar recycling” could entail a “US dollar buyers’ strike [on] low appetite for more US assets,” he wrote, noting that foreigners already own $20 trillion in US stocks, $10 trillion of Treasurys and $5 trillion in US corporate bonds.
Pressure on the Fed to cut will “grow,” he went on. “US policymakers will trade a weaker dollar rather than higher bond yields to attract foreign capital.”
Jeb Bush is only 73. What is he doing now?
“the combination of inflation frustration and job jitters will ultimately limit consumer price increases”
Ultimately? That has already begun. Exhibit One is PepsiCo which was forced to roll back the egregious price hikes they rolled out for salty snacks post-covid. Other consumer good companies may well follow since PepsiCo recently reported that the price cuts actually boosted revenues and, of all things, profits.
As we sit in our America First hot tubs, the beads of sweat are reminding our AI mesmerized brains that we passed the therapeutic 105 degrees a ways back. Might be time to take a break if only we could make our limbs move.
AI is an incoming missile. I have friends and family, who are lawyers, that are telling me about significantly reduced plans for hirings in 2026, compared to even the last few years, as a result of AI. I don’t have any statistics, but I’m also hearing that there are significantly more law school students graduating this year, who have not yet secured a job, than is considered normal.
I’ve said it before, but I’ll say it again: if any white collar worker is dismissing AI, I hope they’re close to retirement because it’s coming for your jobs.
For younger folks, find a job in healthcare or get very good at using AI and your own brain (or just inherit a bunch of money). Otherwise, buckle in because it’s going to be a bumpy ride.
I do think we end up back in a disinflationary environment and would already be there if it weren’t for our commander-in-chief doing everything possible to drive up inflation.
The days of stimmy checks shall come again!
Every day, I think to myself, “these equity gains can’t continue”. And then, the next day, they do.
Someone appears to disagree with Mr. Hartnett:
“Fed’s Waller turns cautious on rate cuts and worries about a ‘lasting increase in inflation”