Recent economic data shows it’s the US consumer vs the Fed
Joe Perry April 16, 2021 5:12 PM
Either the consumer has to cut back expectations of higher inflation or the Fed has to begin to offer signs of tapering monetary policy.
The University of Michigan conducts a poll twice a month on consumer sentiment, which includes both a current sentiment and an expectations sentiment. The Preliminary numbers are released in the middle of the month and the final results are released at the end of the month. Aside from providing insight as to how consumers are feeling about the economy, it also provides inflation expectations for 1 year and 5 years. The consumer sentiment numbers missed expectations; however, they were still the highest they have been since the pandemic began. What is of more interest, though, is the Inflation expectations data. The 1-year inflation expectation was 3.7% vs 3.2% expected and 2.7% for March. This is the highest reading since 2012!
Source: University of Michigan
As evidenced, the stock market is forward looking, meaning they price in future earnings of companies. Today, the S&P 500, the Nasdaq 100, and the Dow Jones have all made all-time new highs. The VIX, which measures volatility of the S&P 500, is trading at pre-pandemic levels, and below the “line in the sand” 20.00 level, near 16.42.
Source: Tradingview, CBOE, FOREX.com
When one looks at recent activity in meme stocks such as GME and AME, the recent fund blowup by Archegos (which not only blew up the fund but cost $10 billion in losses to banks), and recent activity in volatile instruments that are traded on exchanges such as Coinbase, its easy to tell the markets are awash with cash. Why isn’t the Fed pumping the brakes?
Fed Chairman Powell was upbeat at his interview on “60 Minutes” earlier in the week, yet he still uses words such as transitory and unsustainable to describe inflation expectations and bond yields. But the consumer isn’t believing him. With stimulus checks in hand, retail sales skyrocketing, and non-farm payrolls approaching 1 million for the month of March, why wouldn’t consumers expect inflation to be much higher in 1 year? That is the multitrillion dollar question!
There are 2 sayings that are battling it out at the moment. One is “Don’t fight the Fed” and the other is “Never underestimate the US consumer”. Something has to give. Either the consumer has to cut back expectations of higher inflation or the Fed has to begin to offer signs of tapering monetary policy. The winner of this battle is the one that will determine the next direction for monetary policy!
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.