CONSUMER WATCH

From Morning Consult:

Rising energy costs are forcing many households to allocate a higher share of total spending to gas and utilities. Many adults rely on personal vehicles to commute to work, and cold winter temperatures across the country make heating essential to a functioning household. Consumers therefore have little choice but to absorb higher gas and utility bills and pay larger monthly amounts.

As spending on gas and utilities increased in recent months, purchases for services like health care, education, restaurants and travel, as well as spending on consumer products like apparel and furniture trended lower. In contrast with gas and utilities, many of these categories are more likely to be discretionary.

Despite the headwinds facing U.S. adults, spending intentions remain relatively optimistic. Consumers are slightly more likely plan to spend more in March than to intend to cut back on purchases. So far, rather than suppress overall consumer demand, rising prices — including for gas — have mostly impacted consumers by reshaping spending allocations.

However, there are indications that spending momentum may start to fade. Morning Consult’s Daily U.S. Index of Consumer Sentiment — which tends to be a leading indicator of spending — has been sliding lower through early March, falling below the previous low set in April 2020 during the early days of pandemic fallout. Weekly retail sales estimates from the Chicago Fed Advance Retail Trade Summary (CARTS) showed deterioration in spending levels at the end of February, suggesting weakening conditions heading into this month.

Through mid-March, daily gas prices grew an additional 70 cents per gallon, equating to a 19% jump, compared with a 7% increase from the end of January to the end of February. Oil prices are beginning to retreat, but the magnitude of the elevation in price levels suggest the impact of gas prices on spending is likely to be even more pronounced in March than in February. (…)

• In March, consumer confidence dropped 7% for those earning more than $100,000 — a much larger dip than for those earning less than $50,000, according to a measure of consumer sentiment out today as part of the Morning Consult/Axios Inequality Index. (Axios)

Data: Morning Consult/Axios Inequality Index. Chart: Kavya Beheraj/Axios

Dallas Fed Warns Cutoff of Russian Energy Could Cause Global Recession Downturn appears ‘unavoidable’ if bulk of Russian oil and gas products are off the world markets for the rest of the year, according to a report by the regional Fed bank

“If the bulk of Russian energy exports is off the market for the remainder of 2022, a global economic downturn seems unavoidable. This slowdown could be more protracted than that in 1991,” the bank said in a report written by staff economists Lutz Kilian and Michael Plante. (…)

“Unless the Russian petroleum supply shortfall can be contained, it appears necessary for the price of oil to increase substantially and to remain elevated for a long period to eliminate the excess demand for oil,” the report said. “This demand destruction is likely to be assisted by the recessionary effect of higher natural-gas prices and other commodity prices, especially in Europe.”

Meanwhile “the surge in global fuel, electricity, residential natural gas and food prices, as well as the supply-chain disruptions caused directly by the invasion of Ukraine and indirectly by the sanctions against Russia, will sustain inflationary pressures in 2022,” the authors wrote. (…)

More from the Dallas Fed report:

Russia accounts for about 10 percent of global petroleum production. Its crude production exceeds 10 mb/d. It is also a major exporter to world markets, exporting about 5 mb/d of crude oil and close to 3 mb/d of petroleum products. Russia’s main customers include Belarus and China as well as countries in the Organization for Economic Cooperation and Development.

(…) much of the Russian oil that continues to be exported from Baltic and Black Sea ports at steep discounts is not delivered to refiners, as is customary. Instead, trading houses are purchasing the oil and keeping it in commercial storage in Europe, from where it may be potentially resold, bypassing financial sanctions. Buying oil for storage is not prohibited under current sanctions. (…)

It might seem that Europe could cushion the impact of the natural gas and oil shortages by delaying the mothballing of coal and nuclear power plants, but Europe also depends on Russia for 40 percent of its supplies of coal and, more importantly, for natural and enriched uranium. (…)

One reason the 1990 oil supply shock was associated with only a brief U.S. recession was Saudi Arabia’s decision to offset the shortfall of oil production to the best of its ability, making the net shortfall smaller than the original supply shock.

Saudi Arabia and the United Arab Emirates, however, have already signaled that they will not provide relief this time. This decision reflects the growing strategic cooperation between OPEC and Russia as much as the limited spare capacity of OPEC oil producers.

Likewise, the ability of shale oil producers in the United States to significantly boost oil production in the short run is constrained by supply-chain bottlenecks, labor shortages and the insistence of public investors on capital discipline. (…)

Hypothetically, the U.S. could release as much as 4.4 mb/d of crude from its Strategic Petroleum Reserve (SPR), but only for about three months. Additional volumes could be released after that period, but at much slower rate.

• Russia chokes major oil pipeline in further threat to global supplies

Global Bond Plunge Wipes Out $2.6 Trillion, Exceeding Losses of 2008 Financial Crisis

The Bloomberg Global Aggregate Index, a benchmark for government and corporate debt total returns, has fallen 11% from a high in January 2021. That’s the biggest decline from a peak in data stretching back to 1990, surpassing a 10.8% drawdown during the financial crisis in 2008. It equates to a drop in the index market value of about $2.6 trillion, worse than about $2 trillion in 2008.

That’s a blow to money managers accustomed to years of consistent gains, backstopped by loose monetary policy. (…) For investors, it means the allure of holding debt — even safe government bonds — is diminishing given how sensitive valuations are to interest rates, a measure referred to as duration.

(…) equities globally are still nursing losses of about 6% this year. (…)

Stocks as Inflation Hedge Is New Catch-All Narrative for Market Rally

Call them brazen, call them naïve, but stock investors are giving no sign of being daunted by the hottest inflation in decades or the accompanying surge in bond yields.

Their boldness has sent analysts in search of ways to explain how the S&P 500 Index has managed to rally in five of the last six sessions, even as the Federal Reserve promises higher rates while war rages in Europe and Treasury rates see the biggest two-day jump in two years.

One theory gaining traction is that equities are among the best assets to hold when consumer prices are spiraling.

“In inflationary environments, stocks have a distinct advantage over bonds — they’re linked to companies that can adjust pricing — whereas bonds, not so much,” said Lawrence Creatura, a fund manager at PRSPCTV Capital LLC. “Companies, on the other hand, can raise prices and you only have to go to your local 7-Eleven to observe that.” (…)

A look back at the 1970s and early ’80s inflationary period gives clues on the divergence. Nicholas Colas, co-founder of DataTrek Research, found that inflation ran at 159% during that period, while a home-prices index rose by the same amount. Yet the S&P 500 returned an aggregate 169%, showing that earnings can keep up with inflation even if macro growth slows, he said. (…)

Let’s pause here and look at the data. You really have to pick your dates carefully and be very patient and resilient during the “1970s and early 1980s” to achieve anything close to a positive return on your equity holdings:

Keep in mind that the S&P 500 index is not inflation adjusted. The U.S. CPI rose 130% between January 1971 and June 1981. Yes, profits tripled but P/Es were cut in half.

The Bloomberg article continues:

Jonathan Golub, chief U.S. equity strategist and head of quantitative research at Credit Suisse Securities, says the profits backdrop is “broadly supportive.” While some say higher commodities and other input costs put pressure on company margins, the data indicates that margins move in tandem with higher materials prices. That’s due to pricing power as well as operating leverage, and the recent surge in commodities is consistent with firmer margins this year, he wrote in a note.

I don’t have all the data to verify the above but a look at trends between the CPI and pretax corporate profits shows that accelerating inflation is generally not accompanied by accelerating profits. In fact, the opposite is the norm.

The statistical correlation between the S&P 500 Index and the U.S. core CPI is -0.39 since 1955.

It may not be fear of inflation that is convincing people to buy stocks, but a belief that someone is finally about to do something about it, according to Weston. He believes equities have perked up precisely because of the Fed’s stiffening resolve to bring prices under control.

“The fact is a Fed bringing out the big guns in May and using forward guidance to set the scene ahead of this may be welcomed by the equity market — they’ve weighed up the outlook and feel a credible Fed is a strong Fed, and higher rates are better than entrenched inflation,” he said.

The venerable Ed Yardeni:

The only tool that Fed has ever had to bring down inflation is to raise the federal funds rate until it causes a credit crunch and a recession that brings inflation down. That’s the lesson of history. Inflation has always declined as a result of recessions, i.e. hard landings. If the plan is to slowly raise interest rates to gradually slow demand resulting in a soft landing, then good luck with that!

El-Erian Says Cut Stock Holdings as Stagflation Concern Grows

(…) “I don’t think the market has factored in yet what’s going to happen to the economy,” he said. (…)

“The Fed is increasingly being forced to consider what is the least bad policy mistake it wishes to be remembered for: meeting its inflation target by causing a recession, or allowing high and potentially destabilizing inflation to persist well into 2023,” El-Erian wrote. (…)

“If you’re an asset allocator and someone comes up with the proposal that you should reduce equity, you’re going to say: ‘Where do I go?’” El-Erian said. “You go into cash? Hell, no. Inflation is 7.9% and we may touch 10%. You don’t want to go there. That’s a guaranteed negative real return. Bonds? Hell no, bonds are adjusting….You end up not reducing your allocation to equities but actually looking to increase them.”

But, he warned, the relative value of stocks may prove vulnerable. “My baseline, for what it’s worth, is we’re going to see a global stagflation, lower growth, higher inflation,” El-Erian said. “The equity market hasn’t quite priced that in yet because it’s still thinking in a relative space.”

Perhaps the only advantage of wearing white on one’s head…

John Authers: Fright in Bond Markets Feels Like 2007 All Over Again Contradictions in the U.S. economy are about to come to roost. The difference this time is high inflation.

I suppose I should be grateful. I’ve been writing regular markets commentary for a long time. If I haven’t seen it all, I’ve seen a lot. But the last few weeks provide a great antidote to ennui. I’ve never seen anything quite like this —  and as I lack experience, no, I’m not sure I can explain it or predict what happens next. (…)

Using the relative performance of exchange-traded funds tracking the S&P 500 and U.S. Treasury bonds with maturities of 20 years and more as proxies, the following chart shows how stocks have suddenly jolted into higher territory relative to bonds. In this century, there have been only four previous two-week periods when stocks beat bonds by this much. They’re circled on the chart, and as can be seen from the line showing the S&P 500 index in absolute terms, they all came at historic stock market bottoms, at historically good times to buy into stocks — the bear market bottoms of 2002, 2009, 2011 and 2020.  In all cases, the rebounds came after precipitous falls for the stock market. This year’s bad start for the stock market doesn’t really compare:

D.O. again, for the record. In 2002, the trailing P/E was 19.3 and the Rule of 20 P/E was 21.5. Inflation was slowing and the Fed was clearly dovish. At the market bottoms of 2009, 2011 and 2020, the trailing P/E was 12.7, 12.3 and 13.9 respectively. The Rule of 20 P/E: 14.5, 14.3, 16.2. Current: 21.2 and 27.7 with inflation roaring and a clueless Fed clearly hawkish. But who is not clueless these days?

Authers continues:

Sharp increases in the cost of money matter a lot to the economy. They raise the discount rate to be applied to companies’ future cash flows and thus, all else equal, reduce their value. They make borrowing for a house more expensive and endanger the store of wealth represented by the housing market. And they make it more expensive for companies to repay or refinance their debt. In general, any rise in underlying Treasury rates will be magnified for companies, as credit spreads will also rise.

Looking at the credit market, we can see that this is indeed happening, although not yet to an extent that is any great cause for alarm. Yields for both investment grade and high-yield U.S. corporates have been higher in the recent past than they are now, even excluding the Covid shock of 2020. But the speed with which corporate yields are rising again gives the impression of a market process that is coming around from an anaesthetic injected to help it survive the trauma of the credit crisis back in 2008.

If all of this is ample cause for fright, there is also the issue of habit, and how traders and investors can be expected to respond to events of which they have no practical experience. Ten-year Treasury yields have been trending downwards steadily ever since Paul Volcker raised rates enough to cause a recession in the early 1980s. Every time it reaches the top of a cycle and touches or at least nears the downward trend line, a financial accident occurs.

In the chart below, the circles indicate the Black Monday crash of 1987, the Orange County and Tequila crises of 1994; the bursting of the dot.com bubble in early 2000; and the onset of the credit crisis in 2007. Then in early 2018, when the Fed’s tightening actually brought yields above their long-term trend, we witnessed the so-called “Volmageddon” selloff early in the year, when bets on volatility to stay low when spectacularly wrong, and the “Christmas Eve Massacre” selloff at the end. All that financial turbulence was enough to force the Fed to pivot and abandon its tightening:

(…) The point of Volcker was that he eliminated inflation from the equation. The Fed relented and came to the rescue in all the crises and mini-crises of the last four decades because it could. Inflation wasn’t particularly high and nothing too much was lost by cutting rates. That isn’t true now. Two dei ex machina have appeared. The coronavirus, the money it caused to be printed, and the supply blockages it created helped jolt inflation sharply upward. And in the last month, Vladimir Putin has pushed inflation expectations still higher.

My reason tells me that equities are enjoying a false dawn as they’re recipients of the money coming out of bonds, and that we are about to be reacquainted with the bear markets in both bonds and stocks which come when rates have to rise to control inflation. (…)

Deutsche Bank to Hike Pay by 5.2% as Inflation Rages Deutsche Bank AG agreed to boost wages for 8,000 staff by 5.2% in two steps in a nod to accelerating inflation in Germany.

Half-hearted sanctions against Russia have already failed

(…) The US Treasury’s sanctions office (OFAC) has made life easier by leaving a loophole for sovereign debt repayments, concerned that there might otherwise be a Lehmanesque shock to global finance.

The uninterrupted flow of fossil revenues – at windfall prices – is enough to cover interest service costs and redemptions. Goldman Sachs even thinks that the central bank will be able to relax capital controls gradually.

We are facing the failure of western sanctions policy. Calibrated half-measures are not sufficient to change the Kremlin calculus or to dissuade Putin from a policy of attrition against civilian targets. (…)

Western sanctions against the central bank are not proving to be the killer blow supposed at first, and nor is the ejection of some Russian banks from the SWIFT nexus of global payments. There are too many deliberate exemptions. 

Goldman’s deep-dive into the effect of sanctions ought to end all wishful thinking. The US investment bank forecasts that the Russian economy will contract by 10pc this year, a bad recession but not an economic breakdown. Growth will then recover to 2.4pc next year and 3.4pc in 2024 as the country adjusts. Exports will be back to 98pc of prior levels by early next year. If so, Putin is not going to lose sleep over this. (…)

“If Russia were fully integrated into global supply chains, restrictions on imports and exports would be immediately destructive. However, Russia largely exports goods that are almost fully produced locally,” said Mr Grafe. (…)

Professor Moritz Schularick from Bonn University said an immediate halt to all purchases of Russian gas, oil, and coal, would cut German GDP by 3pc this year and cost around €120bn but is perfectly feasible. “The world wouldn’t end,” he said.

The possible measures are by now well known. Every one degree cut in home heating saves 10 billion cubic metres (BCM) of gas. If Europe dialled down from an average of 22 to 19 degrees, which happened in some states in the 1973 crisis, it could already cover one fifth of total Russian supply. Targeted sections of heavy industry can be rationed with a small loss of GDP.

As for oil, the International Energy Agency has just cut its forecast for global demand this year by 1.3m barrels a day (b/d). It has issued a 10-point plan for rapid cuts that could shave a use by a further 2.7m b/d without causing an economic crisis, chiefly by a string of temporary measures such as lowering speed limits by 10 km/h, car-free Sundays, and less air travel. Together these savings add up to 4m b/d, equal to most of Russia’s oil exports to Europe.

The issue is no longer whether it can be done but whether Europe has the political courage to try. What is clear is that western sanctions policy is the worst of all worlds. We are suffering an energy shock that is further inflating Russia’s war-fighting revenues.

While it is hard to separate the effect of sanctions from war disruption and market psychology, the current situation is intolerable. We are allowing Putin to exploit Russia’s leverage as a full-spectrum commodity superpower.

The spot price for ammonia in Europe has risen sevenfold this year, deliberately pushed higher by a Kremlin ban on fertiliser exports that has no other purpose than causing maximum chaos and probably a global food shortage over the next year. Shortages of nickel, palladium, and other metals are becoming critical.

It is a strategic imperative to bring this crisis to a head immediately by raising the ante. A total energy embargo would buttress the military resistance of the Ukrainian armed forces and test whether it is even possible for Putin to continue prosecuting a bungled invasion. 

As matters now stand, the sanctions have failed to achieve anything. It is Ukrainian resistance, and military kit mostly provided by the Anglo-Saxon powers of Nato and frontline EU states, that have so far held the line. Core Europe has done little more than bleat on the margins. (…)

Biden Administration to Stop Reimbursing Hospitals for Covid-19 Care for Uninsured Some people without health insurance will begin getting bills for Covid-19 treatments and testing after the Biden administration Tuesday starts winding down a federal program that reimburses providers for virus-related care for the uninsured.

(…) because it is running out of money. The administration and hospitals are urging lawmakers to approve more funding for the program. (…)

The administration said it will stop accepting claims for treatment and testing for uninsured people Tuesday, and the deadline for claims for administering vaccines is in two weeks.

After that, the medical bills for uninsured Covid-19 patients will depend on each hospital’s financial-aid policy and their prices, both of which can vary widely from one hospital to another. (…)

Some states set requirements. Prices for the same services are also sharply different across hospitals, with the uninsured often facing the highest prices. (…)

An estimated 9.6% of the population, or 31.1 million people, lacked health insurance in the first six months of 2021, according to the Centers for Disease Control and Prevention. (…)

The White House says the lack of new congressional funding means it won’t be able to purchase a second round of boosters for the general public, should federal regulators authorize another dose of the vaccine. (…)

Administration officials say they also expect the funding issue to impact the supply of monoclonal antibodies. They are also closely monitoring a new variant, BA.2, that has triggered an increase in cases overseas.

“Our concern right now is that we are going to run out of money to provide the types of vaccines, boosters, treatments to the immunocompromised and others free of charge that will help continue to battle” the pandemic, White House press secretary Jen Psaki said Monday.

FYI:

Coming in 2022: A big leap in smart home technology Starting next year, consumers will be able to buy smart home devices — like thermostats, lighting systems and kitchen appliances — that can talk to one another through a new connectivity standard called Matter.