Small Business Owners’ Expectations for the Future at 48-year Low Inflation continues to be No. 1 problem as owners raising selling prices matches record high
The NFIB Optimism Index fell 0.1 points in May to 93.1, marking the fifth consecutive month below the 48-year average of 98. Owners expecting better business conditions over the next six months decreased four points to a net negative 54%, the lowest level recorded in the 48-year-old survey. Expectations for better business conditions have deteriorated every month since January.
Twenty-eight percent of owners reported inflation was their single most important problem in operating their business, a decrease of four points from April. The net percent of owners raising average selling prices increased two points to a net 72% (seasonally adjusted), back to the highest reading in the 48-year-history of the survey last reached in March and 32 points higher than May 2021.
“Inflation continues to outpace compensation which has reduced real incomes across the nation,” said NFIB Chief Economist Bill Dunkelberg. “Small business owners remain very pessimistic about the second half of the year as supply chain disruptions, inflation, and the labor shortage are not easing.”
Other key findings include:
- Fifty-one percent of owners reported job openings that could not be filled, up four points from April.
- The net percent of owners who expect real sales to be higher decreased three points from April to a net negative 15%.
- A net 46% (seasonally adjusted) of owners reported raising compensation, down three points from April with a net 25% planning to raise compensation in the next three months, down two points from April but historically high.
- Thirty-nine percent of owners report that supply chain disruptions have had a significant impact on their business, up three points. Another 31% report a moderate impact and 22% report a mild impact. Only 8% of owners report no impact from the recent supply chain disruptions.
(…) Unadjusted, 3% of owners reported lower average selling prices and 71% reported higher average selling prices. Price hikes were the most frequent in wholesale (80% higher, 4% lower), manufacturing (79% higher, 1% lower), retail trades (78% higher, 2% lower), and construction (77% higher, 2% lower). (…)
One percent of owners (seasonally adjusted) reported higher nominal sales in the past three months, down two points from April. The net percent of owners expecting higher real sales volumes decreased three points to a net negative 15%.
The net percent of owners reporting inventory increases fell five points to a net negative 1%. Seventeen percent of owners reported increases in stocks while 15% reported reductions as solid sales reduced inventories at many firms. A net 8% of owners viewed current inventory stocks as “too low” in May, up two points from April. A net 1% of owners plan inventory investment in the coming months.
The frequency of reports of positive profit trends was a net negative 24%, down seven points from April. Among the owners reporting lower profits, 34% blamed the rise in the cost of materials, 25% blamed weaker sales, 10% cited labor costs, 9% cited the usual seasonal change, 8% cited lower prices, and 3% cited higher taxes or regulatory costs. For owners reporting higher profits, 49% credited sales volumes, 18% cited higher prices, and 16% cited usual seasonal change.
30-Year Mortgage Rates Increase to 6.13%
India’s wholesale price inflation runs at 30-yr high, makes rate hikes more likely
Bond Slide Continues, With No End in Sight U.S. Treasury yields have surged to new multiyear highs, reflecting uncertainty over how high the Fed will have to raise interest rates to tame inflation.
(…) Heading into Friday, there was widespread hope on Wall Street that bond yields had finally reached the peak of this year’s climb, having done enough to tighten financial conditions that consumer demand and inflation could gradually return to more sustainable levels. Now, many say they have little idea how high the Federal Reserve will have to raise short-term interest rates to wrest control of prices, which are currently rising at a rate several times higher than the central bank’s 2% annual target.
“There is definitely an element of capitulation,” in the bond market’s move, said Thomas Simons, senior vice president and money-market economist in the Fixed Income Group at Jefferies LLC. “There is a general acknowledgment that Friday’s data was a profound message.” (…)
On Monday, the yield on the benchmark 10-year U.S. Treasury note settled at 3.371%, its highest close since April 2011 and up from 3.041% on Thursday. (…)
The two-year yield, more sensitive to the near-term outlook for monetary policy, settled at 3.279%, up from 2.815% Thursday, and surged as high as 3.413% in late trading after the Journal report. It has climbed 0.641 percentage point over the past seven trading sessions, the largest seven-day yield gain since 2001.
Friday’s consumer-price-index data could hardly have been more dispiriting, according to investors and analysts. Not only did headline inflation reach a four-decade high at a point when many investors had expected it to be coming down, but there were substantial price increases across the board, in everything from housing costs to children’s footwear. (…)
Delivering another blow to Treasurys, data released just an hour and a half after the CPI report showed consumers’ long-term inflation expectations rising to their highest level since 2008. That hurt the argument that anchored inflation expectations would help keep a lid on actual inflation. (…)
As of Friday, the Bloomberg U.S. Aggregate bond index—largely U.S. Treasurys, highly rated corporate bonds and mortgage-backed securities—had returned minus 11% this year. Its second-worst performance over the same period was minus 2.9% in 1984, in records going back to 1976. (…)
“Perhaps the biggest risk for higher rates is that investors just decide to sell bonds,” said Donald Ellenberger, a senior fixed-income portfolio manager at Federated Hermes. “If investors decide that bonds aren’t doing a very good job hedging stocks and still aren’t paying much income, we could see rates spike higher because Wall Street dealers don’t have the balance-sheet capacity or desire to warehouse bonds nobody wants.”
CMG Wealth’s dashboard carries a lot of red and mainly downward arrows, whatever the asset class:
Fed Likely to Consider 0.75-Percentage-Point Rate Increase A string of troubling inflation reports is likely to lead Federal Reserve officials to consider surprising markets with a larger-than-expected interest-rate increase at their meeting this week.
(…) Before officials began their premeeting quiet period on June 4, they had signaled they were prepared to raise interest rates by a half percentage point this week and again at their meeting in July. But they also had said their outlook depended on the economy evolving as they expected. Last week’s inflation report from the Labor Department showed a bigger jump in prices in May than officials had anticipated.
Two consumer surveys have also shown households’ expectations of future inflation have increased in recent days. That data could alarm Fed officials because they believe such expectations can be self-fulfilling. (…)
The Fed last raised rates by 0.75 percentage point at a meeting in 1994 [November], when the central bank was rapidly raising rates to pre-empt a potential rise in inflation. (…)
“What we need to see is clear and convincing evidence that inflation pressures are abating and inflation is coming down. And if we don’t see that, then we’ll have to consider moving more aggressively,” Mr. Powell said [last month]. (…) “We therefore will need to be nimble in responding to incoming data and the evolving outlook,” he said. (…)
“We believe that risk-management considerations call for aggressive action to reinforce the Fed’s inflation-fighting credibility,” Barclays economists wrote in a subsequent report Monday. While such a move “would go against communications leading into the blackout period,” the report said “risks of prolonged inflation have intensified,” justifying the larger rate rise.
After the publication of this article on Monday afternoon, other forecasters, including at JPMorgan Chase & Co. and Goldman Sachs Group Inc., said they expected a 0.75-percentage-point rate rise this week. (…)
“It’s a one-two punch,” said Diane Swonk, chief economist at Grant Thornton. “They’ve got to go now with 75. The Fed is behind the curve, and they know it.”
On Friday, a University of Michigan survey of consumers’ long-term inflation expectations rose to its highest level since 2008. On Monday, the New York Fed reported that its survey showed consumers’ short-term inflation expectations had jumped and that the distribution of households’ longer-term expectations was more varied than in the past, suggesting more households might be expecting higher inflation to stay, even though the median didn’t rise. (…)
Alternatively, Mr. Powell and his colleagues could signal a rising likelihood of shifting to larger rate rises at the Fed’s meeting in late July.
But if officials anticipate a significant likelihood of such an increase at the July 26-27 meeting, they could decide to move more aggressively this week.
Ms. Swonk said she expected officials to make such an argument at this week’s meeting. “The data now is not good. The data is saying they have to do more,” said Ms. Swonk. “We’re moving into a more inflation-prone world, and they know that, and if they don’t derail it now, this could be incredibly corrosive.”
Already, borrowing costs set by markets have climbed faster than the Fed’s benchmark rate in anticipation of its policy moves. Mortgage lenders on Monday said they were beginning to quote a 30-year fixed loan with rates above 6%, levels that haven’t been reached since 2008.
Other analysts said Monday afternoon that a larger 0.75-point rate jump would cause more problems for the central bank than it would solve by confusing investors about how the Fed reacts to new data.
“It just opens up additional communication challenges thereafter,” said Neil Dutta, an economist at research firm Renaissance Macro. “It suggests the Fed is losing confidence in its forecast. We all know they were trying to catch up, but now it looks like they are panicking.”
Mr. Dutta said he also worried that a supersize rate increase would make it harder for the central bank to avoid a recession. “It suggests the Fed is willing to push the economy into a ‘hard-landing’-like scenario to get inflation under control,” he said.
This FOMC meeting is most interesting:
- Powell and Co. have said repeatedly that they are focused on inflation and data dependent and that they will appropriately react to data. Powell recently draped himself in a Volcker suit and warned that there will be pain.
- This May CPI report was unambiguously and universally acknowledged as very bad. The data is clear to everybody.
- Show your cards Mr. Powell… or fold and lose credibility.
- The next FOMC is July 26-27, then September 20-21.
- Can he talk his way out, waiting hopefully for the May PCE report (June 30) and agonize until the June CPI on July 13?
- Assume May retail sales are pretty weak tomorrow (consensus +0.1%, range -1.1%-0.4%, vs +0.9% in April). Core Goods CPI was up 0.7% in May and Target revised down its Q2 guidance 3 weeks after its first negative guidance.
- Will they judge that 75 point could add too much pain but risk the market wrath?
John Authers: The Fed Has No Choice But to Let This Tantrum Rip With inflation having gained momentum, policy makers can no longer calm things down. Indulging the bond market last year may prove a critical mistake.
(…) This is one of those times when you can believe what you read in the papers — the Fed has now set everyone up for a 75-basis-point hike on Wednesday. Anything else would be a huge surprise. The story, breaking first in the Wall Street Journal, arrived in time to accelerate what were already dramatic market moves. (…)
What are the chances that the Fed surprises by being lenient on Wednesday, as Bernanke was in September 2013? Judging by the guidance given to my colleagues in the financial press, I would say roughly zero. Now real yields have reached September 2013, in possibly even more disorderly fashion, but the reality of inflation makes it impossible for the Fed to calm everyone this time. (…)
Meanwhile, other central banks are under pressure of their own. In Europe, the yield on 10-year Italian BTP bonds topped 4%, for the first time since the first week of 2014, after a frighteningly vertiginous ascent. This has nothing to do with any specific news out of Italy, and everything do with signs that rates in the euro zone and the US are going to be rising a lot. It’s almost a decade since the European Central Bank promised to do “whatever it takes” to save the euro, and surprisingly the market never forced the ECB to prove this. Now, the issue of how to prevent euro fragmentation, with all the thicket of legal and political issues it raises, is unavoidably back. With the ECB under new management, it may at last be called upon to fulfill its promise. As with the Fed, that’s much harder to do when inflation is running far ahead of target:
But the real problem could be for the Bank of Japan, the exception to all global monetary rules. It instituted a revolutionary policy of “yield curve control” way back in early 2016, as the country’s stocks went into a bear market and Asia battled to deal with the impact of a sudden Chinese devaluation. Effectively, the BOJ promised not to let the 10-year yield rise above 0.25%. Merely saying this was enough to send the JGB yield steeply negative. Like the ECB’s “whatever it takes” promise, it was a signal that had its own effect.
Now, just like the ECB’s promise, the BOJ’s yield curve control is being put to the test. As of now, the 10-year JGB yields a fraction above 0.25%:
(…) Both the BOJ and the Ministry of Finance, in a rare display of unity, made clear last week that they were uncomfortable with the yen’s low level. That didn’t stop the currency from dropping below 135 per dollar for the first time since the Asian financial crisis in 1998.
Can the BOJ possibly keep this up? We’ll know Friday, but the market sentiment is that something will have to give soon. Direct intervention to strengthen the yen is hard to justify as it is currently being driven by orthodox domestic economic factors. So does the BOJ abandon yield curve control, or at least permit yields to rise to 0.5%? Probably.
That will have ramifications. Germany and Japan have come to be regarded as reliable suppliers of very cheap money. The ructions of the last few days are driven in large part by the realization that German rates can no longer be relied on. The BOJ’s meeting could yet prove even more consequential for the world than the FOMC’s two days earlier.
Wall Street’s Favorite Recession Signal Is Back as Curves Invert
Stagflation Fears Surge and ‘Sentiment Is Dire’ in BofA Survey
Investor fears of stagflation are at the highest since the 2008 financial crisis, while global growth optimism has sunk to a record low, according to Bank of America Corp.’s monthly fund manager survey.
Global profit expectations also dropped to 2008 levels, with BofA strategists noting that prior troughs in earnings expectations occurred during other major Wall Street crises, such as the Lehman Brothers bankruptcy and the bursting of the dotcom bubble.
BofA’s survey, which included 266 participants with $747 billion under management in the week through June 10, ended before the US inflation data on Friday “shattered” hopes of the Federal Reserve pausing its aggressive cycle of rate hikes, according to strategists led by Michael Hartnett.
“Wall Street sentiment is dire but no big low in stocks before big high in yields and inflation, and the latter requires uber-hawkish Fed hikes in June & July,” Hartnett wrote.
The results — including 73% of respondents expecting a weaker economy in the next 12 months, the lowest since the survey started in 1994 — provide insight into fund manager allocations and sentiment right before the S&P 500 collapsed into a bear market on Monday as surging US inflation fueled fears of sharper Fed action. (…)
Hawkish central banks was seen as the biggest tail risk to markets among investors, followed by global recession. Long oil and commodities was the most crowded trade.
