CONSUMER WATCH
From Bank of America Institute:
Seasonally-adjusted spending per household rose 0.9% month-over-month, after the 1.0% MoM jump in February. Excluding higher gasoline spending, the MoM rise in total spending was a more modest 0.1%. (…)
Higher-income households’ after-tax wage and salary growth rose sharply in March, to 5.6% YoY – the fastest YoY growth since August 2021 – up from 4.2% in February, according to Bank of America deposit data. And while there was a rebound in middle- and lower-income households’ after-tax wage growth in March, it was smaller, to 2.0% and 1.0% YoY, respectively.
As a result, the divergence with higher-income households widened to the largest gap we’ve seen since our data series began in 2015
(…) the gains among higher-income households are likely, in part, the result of bigger bonuses.
The rapid rise in gasoline prices in March – from just below $3 a gallon nationally to around $4 by the end of the month was reflected in a spending increase at the pump. According to Bank of America card data, gasoline spending per household surged 16.5% MoM in March. Interestingly, we also saw a rise in gasoline transactions despite higher prices – in our view likely as drivers tried to get ahead of price rises by filling up early.
While the duration of the conflict is highly uncertain – as is the impact on oil prices – if higher gas prices are sustained for a prolonged period all households will be impacted, but lower-income families are most exposed. Household monthly gasoline spending for this cohort was equivalent to around 8-10% of their total card spending throughout most of the past eight years, roughly twice that of those with higher incomes. (…)
One relief for households navigating higher gasoline prices is coming from higher tax refunds and lower tax payments. BofA Global Research notes that the lower payments – resulting from the One Big Beautiful Bill Act (OBBBA) – may benefit higher-income households more than anyone else. And Bank of America deposit data confirms that these households are also seeing a bigger increase in tax refunds as well. (…)
Lower-income households, in particular, are using their tax refunds to cut debt by increasing their credit card payments. Thus, this tax season has allowed some of them to meaningfully repair their household balance sheets. Additionally, our data shows another potential use for tax refund increases: the extra cash could help buffer the increases in gasoline spending for at least five months.
How Transitory Is The Inflation Problem Ahead?
(…) Last year, the Fed tolerated the lack of progress toward its 2% target because the inflationary impact of tariffs was widely expected to be transitory. Moderating services inflation was cited as evidence that underlying inflationary pressures were easing.
Fast forward to February 2026, and the assumption about tariffs has yet to be vindicated. Durable goods inflation surged 1.1% m/m in February–the strongest monthly reading since January 2022. It is up from -3.1% y/y in May 2025 to 2.8% currently.
The March FOMC meeting Minutes confirmed that policymakers still expected the inflationary impact of tariffs to fade over the course of this year. According to the Minutes, “participants generally expected that the effects of tariffs on core goods prices would diminish this year.”
Fed officials seem to have the same transitory assessment of the latest energy price shock, which is very similar to the one during 2022.
Back then, inflation began rising in 2021 due to pandemic-related supply chain disruptions. The energy price shock exacerbated inflation and forced the Fed to raise interest rates more aggressively after it realized the inflation problem was more persistent than expected.
This time, the energy shock is hitting while inflation has remained stuck around 3.0% due to tariffs, which are having a more persistent inflationary impact than Fed officials might have expected.
The risk is that the shock will boost inflation more broadly in the coming months. Consider the following:
(1) In 2022, a surge in jet fuel prices translated directly into a spike in the CPI for airline fares. It is doing that again.
(2) A surge in WTI crude oil prices translated into a spike in the CPI for transportation services back in 2022. It is doing that again.
(3) The bottom line is that there is a risk that inflation will turn out to be more persistent than widely expected, including by Fed officials, once again. If so, then beware of an adverse reaction from the Bond Vigilantes once they wake up from their siesta.
We are still using a 4.25%-4.75% range for the 10-year Treasury yield this year. We are at the bottom of that range now, but thinking that the next move might be to the top end.
FYI via Goldman Sachs:
The core PCE price index rose 0.37% in February, and the YoY rate edged down to 2.97%.
Core goods prices rose 0.84% (the fastest pace since January 2022), likely reflecting continued tariff passthrough and a 6.5% month-over-month increase in software prices, the second-largest since 1980 (after a 7.0% increase in December 2025).
Core services prices rose 0.22%.
Headline PCE rose 0.38% in February, reflecting a 0.45% increase in food and energy prices.
Personal income declined 0.1% (nominal) in February, against expectations for an increase. Personal spending rose 0.5% in February, and January spending growth was revised down 0.1pp to 0.3%.
The saving rate declined to 4.0%, roughly in line with its 2025Q4 level.
China Ends Over Three Years of Factory Deflation After Oil Shock
Producer prices rose 0.5% in March from a year earlier after a drop of 0.9% in the previous month, according to data released by the National Bureau of Statistics on Friday. The median estimate of economists surveyed by Bloomberg was 0.4%.
But consumer inflation cooled more than expected to 1%, down from 1.3% in February, as a seasonal boost from holiday spending petered out. The core consumer price index, which excludes volatile items such as food and energy, slipped to 1.1%. (…)
But a continued fall in the price of consumer goods at the factory gate suggests broader spending by households remains weak. (…)
What’s Going on in Private Credit?
From a new, and lengthy (and somewhat self-serving), Howard Marks’ memo:
(…) Direct Lending and Software
In recent years, sponsors have increasingly turned to direct lending as an alternative to broadly syndicated loans, as the former allowed them to get the capital they needed from a few big lenders, freeing them from protracted road shows, widely distributed financial disclosure, and having to deal with a large number of counterparties if trouble necessitated renegotiation. Direct lenders have also shown a willingness to support higher debt levels, enabling sponsors to achieve leverage beyond what the syndicated loan market might accommodate. They’ve also been willing to lend more to companies that are not yet profitable in the form of “AAR loans” based on annual recurring revenue.
The attractiveness to sponsors of loans versus bonds and private versus public brought the representation of software debt in the U.S. sub-investment grade credit markets to roughly the following proportions:
High yield bonds 4-5%
Broadly syndicated loans 10-15%
Direct lending 20-30%
In addition, thanks to the same factors, the percentage of software debt that is to companies that were the subject of leveraged buyouts (meaning they’re more highly levered) is higher in the broadly syndicated loan market than in the high yield bond market, and higher still in the direct lending market.
As a result of all the above, a significant portion of direct loans were made to software companies, which were often acquired at high EBITDA multiples of ~20x and with high leverage ratios. Now, suddenly, software company debt is in the news.
Over the last year or two, artificial intelligence has significantly reduced the need for humans to write code (that is, program computers or write software), largely relegating coders to instructing AI models what to do. The market for software company stocks and debt didn’t react much in 2024-25. Then, in November 2025, Anthropic released a powerful new model for coding, followed in late January by the release of 11 “plug-ins” to automate tasks in a number of fields. It seems a cognitive tipping point was reached in the first days of February. Investors finally took notice of the negatives that had accumulated, and the private credit market has faced scrutiny and volatility ever since:
Worry about software debt made investors in semi-liquid public vehicles put in for redemptions.
Limits on redemptions caused investors to question the safety of their investments.
The process through which some investors got out at the stated net asset value might have caused those remaining to question whether the NAVs people exited at were overstated and if so what the impact might be on them.
When funds limited redemptions, investors might reasonably have concluded that they should put more shares in for withdrawal next time.
The redemption limits built into the direct lending funds appear to have worked as designed so far, allowing managers to avoid fire-sale liquidations. But it would be understandable if investors reacted negatively to being told they can’t get their money out when they want.
The rest of the memo is interesting for financial history buffs and for understanding the Brookfield/Oaktree investment approach.
Almost Daily Grant’s yesterday piece is much more revealing of what’s going on in Private Credit:
The hour is getting late for scores of speculative-grade software firms, with upwards of $330 billion in high-yield, leveraged loan and business development obligations tied to the sector set to mature over the next three years, per Bloomberg-compiled data.
With artificial intelligence presenting an existential threat to industry business models, aggressive capital structures leave little room for error. “Software borrowers from private credit funds are more highly leveraged and more dependent on future growth expectations than borrowers in other industries, making them more sensitive to adverse shocks,” analysts at MSCI warned.
Software accounted for well over 40% of all private equity deals across the venture, growth and buyout categories since 2020, Bloomberg finds, with the sharp post-Covid rise in borrowing costs further complicating refinancing efforts.
“The credit dates for a third of these loans are still 2021, meaning the issuer has not demonstrated capital market access in many years,” analysts at Citi find. “The average price of the 2021 vintage/2028 maturity is 83.4 [cents on the dollar], signaling significant stress.”
The suddenly stricken software sector adds another headache for the private equity-cum-credit complex. Ebitda growth among closely held firms tracked by Lincoln International registered at 4.7% as of Dec. 31, decelerating from 6.5% and 5.2% expansions in the second and third quarters, respectively.
Meanwhile, covenant amendments jumped by 13% on a sequential basis during the final three months of 2025 while 11% of private loans utilized some form of payment in kind – servicing obligations with fresh debt rather than cash – last year, up from 7% in 2021. The share of “bad PIK,” or loans that did not originally feature that option and were then amended to do so, reached 6.4%, up 2.5% four years earlier.
“We have seen a steady slowing of EBITDA growth during 2025 and companies not being able to organically deleverage,” Ron Kahn, managing director and global co-head of Lincoln’s valuations and opinions group, told industry publication Private Equity Professional in February.
“Many of these deals likely mature in the next two years and we estimate that around 30 to 40% of the deals maturing in the next two years have already extended their maturity once, meaning that lenders either need to provide an incremental extension or potentially explore a restructuring if these deals cannot otherwise be refinanced.”
A Cease-Fire for Now in Iran, but a Blow to American Credibility Critics wonder if this is America’s “Suez moment,” when a leading power signals the start of its international decline.
(…) The Suez analogy works, Mr. Wertheim said, in that the war in Iran demonstrated “in a single incident the danger of American misgovernance and poor judgment.” (…)
The war itself and its uncertain outcome, he said, “just accelerates an existing worry shared by countries around the world about what America’s declining quality of governance means for what they can expect from the United States.”
America’s allies may be unhappy, perplexed and even angry about Trump administration policies, but many of them, especially those in the Persian Gulf and Asia suffering the impact of energy shortages and restrictions, have few other options for security partners.
But the war and cease-fire deal have diminished American influence and will affect how the allies of the United States view its reliability, said Charles A. Kupchan, a political scientist and director of European studies at the Council on Foreign Relations.
The war against Iran was not begun in consultation with allies. And it came after a series of events that have confounded them. Mr. Trump’s tariff wars were an unpleasant shock, but his threat to take Greenland by force if necessary from Denmark, a European and NATO ally, is seen as an inflection point about American predation, unreliability and contempt for traditional friends.
“The Iran war and its economic impact are piling on and reinforce this sense that the U.S. right now has become unpredictable and undependable,” Mr. Kupchan said.
International relations and alliances work on trust. But as Francis Fukuyama of Stanford University wrote on Tuesday, “There has never been a time when the United States was more distrusted, by both traditional friends and by rivals, as at the present.”
A successful dealmaker, he said, needs to generate a minimal amount of trust that he will uphold his end of the bargain. “But reciprocity is a virtue that Trump has never understood or practiced,” he said. (…)
“By engaging in a war of choice in a critical region for global trade and utterly ignoring the probable consequences for the economies of its closest allies, the Trump administration has destroyed the legitimacy of American power,” asserted Anatol Lieven of the Quincy Institute for Responsible Statecraft.
The impact of a diminished United States is strongest in Europe, which has relied on NATO and the American security guarantee implicit in membership, including the U.S. nuclear umbrella. But Europeans drew a distinction between faith in America and faith in Mr. Trump. The former remains because it is vital for European security.
Still, Mr. Trump’s policies are inevitably producing a response that will outlast him. The rest of the world is trying to organize itself and derisk from an America that treats its allies as enemies and its traditional enemies, like Russia and China, as friends. (…)
In the long run, China looks to be the bigger winner.
“While we look crazed and talk about bombing a country back to the stone age, China looks like a peacemaker and agent of stability,” he said. All the while, Beijing got a chance to watch how the U.S. Navy operates.
“China is looking on with a great deal of glee, and when Trump goes there” for a summit meeting now scheduled for mid-May, “he will be much diminished.”
China, which gets so much of its oil through the Strait of Hormuz, pushed Iran to agree to the cease-fire, and it is expected to participate in keeping the strait open and guaranteeing safe passage for others.
Much depends on how the war ends, cautioned Mr. Kupchan of the Council on Foreign Relations.
If the cease-fire leads to a deal that imposes significant constraints on Iran’s nuclear program and its ability to cause trouble, he said, that would be much better in the longer run than a frozen conflict or one that “just burns on month after month,” with all the accompanying impact on the energy market and American allies.
That Easter morning tweet certainly did not help Trump’s standing:
Open the Fuckin’ Strait, you crazy bastards, or you’ll be living in Hell – JUST WATCH! Praise be to Allah. President DONALD J. TRUMP.”
Talk about “Epic Fury!”.