Investors Watching for a “Santa Rally” the Last Trading Week of 2022
Stocks in the US closed higher Friday after consumer inflation continued to ease modestly, and consumer expectations are for the trend to continue. This could set the stage for the week ahead as some expect the probability of a “Santa rally” as investors may begin using their dry powder to wave in some stocks that have gone down with the crowd but are historically cheap and showing value.
Stock markets in London, Toronto, Sydney, Hong Kong, and Johannesburg are closed. on Tuesday, December 27, since Boxing Day was already a holiday since Christmas fell on a Sunday.
The four-day trading week ahead includes the latest data on home prices with the S&P CoreLogic Case-Shiller National Home Price Index and Freddie Mac’s House Price Index (October). On Wednesday, the National Association of Realtors (NAR) will issue pending home sales figures (November). The strength of the manufacturing sector on Friday, with the Chicago Purchasing Managers’ Index (PMI) for December, has market-moving potential on the last trading day of the year.
Monday 12/26
Markets and Government Offices closed.
Tuesday 12/27
Stock markets in London, Toronto, Sydney, Hong Kong, and Johannesburg are closed.
8:30 AM ET, The US Goods Deficit (Census basis) is expected to narrow to $97.0 billion in November after deepening by more than $6 billion in October to $98.8 billion.
8:30 AM ET, Wholesale Inventories, where buildups have been lessening, are expected to rise 0.4 percent in the advance report for November.
9:00 AM ET, Case-Shiller Home Price Index, forecasters see the adjusted 20-city monthly rate falling 1.2 percent again in October after a decline of 1.2 percent in September for an unadjusted annual rate of 8.1 percent versus September’s 10.4 percent.
Wednesday 12/28
10:AM ET, Richmond Fed Manufacturing Index, the manufacturing composite is expected at minus 6, in December vs. minus 9 in November and minus 10 in October.
Thursday 12/29
8:30 AM ET, Jobless Claims for the December 29 week are expected to come in at 222,000 versus 216,000 in the prior week.
Friday 12/30
• 9:45 AM ET, The Chicago PMI is expected to bounce back in December to 41.0 versus November’s much weaker-than-expected 37.2.
The Bond markets are scheduled to close at 2 PM. Stocks have the benefit of a full trading day to close out 2022.
What Else
Replays of the Noble Capital Markets analysts’ discussions of companies they cover on Wall Street Wish List, are now available on Channelchek to help you create your own wish list for 2023. Find them here in Channelchek’s Video Content Library. And if you haven’t signed up for regular emails from Channelchek now is a good time to sign-up and see how helpful they are
Happy New Year from the entire content team at Channelchek!
The Difficult Reality of Rising Core and Super-Core Inflation
While many market participants are concerned about rate increases, they appear to be ignoring the largest risk: the potential for a massive liquidity drain in 2023.
Even though December is here, central banks’ balance sheets have hardly, if at all, decreased. Rather than real sales, a weaker currency and the price of the accumulated bonds account for the majority of the fall in the balance sheets of the major central banks.
In the context of governments deficits that are hardly declining and, in some cases, increasing, investors must take into account the danger of a significant reduction in the balance sheets of central banks. Both the quantitative tightening of central banks and the refinancing of government deficits, albeit at higher costs, will drain liquidity from the markets. This inevitably causes the global liquidity spectrum to contract far more than the headline amount.
Liquidity drains have a dividing effect in the same way that liquidity injections have an obvious multiplier effect in the transmission mechanism of monetary policy. A central bank’s balance sheet increased by one unit of currency in assets multiplies at least five times in the transmission mechanism. Do the calculations now on the way out, but keep in mind that government expenditure will be financed.
Our tendency is to take liquidity for granted. Due to the FOMO (fear of missing out) mentality, investors have increased their risk and added illiquid assets over the years of monetary expansion. In periods of monetary excess, multiple expansion and rising valuations are the norm.
Since we could always count on rising liquidity, when asset prices corrected over the past two decades, the best course of action was to “buy the dip” and double down. This was because central banks would keep growing their balance sheets and adding liquidity, saving us from almost any bad investment decision, and inflation would stay low.
Twenty years of a dangerous bet: monetary expansion without inflation. How do we handle a situation where central banks must cut at least $5 trillion off their balance sheets? Do not believe I am exaggerating; the $20 trillion bubble generated since 2008 cannot be solved with $5 trillion. A tightening of $5 trillion in US dollars is mild, even dovish. To return to pre-2020 levels, the Fed would need to decrease its balance sheet by that much on its own.
Keep in mind that the central banks of developed economies need to tighten monetary policy by $5 trillion, which is added to over $2.50 trillion in public deficit financing in the same countries.
The effects of contraction are difficult to forecast because traders for at least two generations have only experienced expansionary policies, but they are undoubtedly unpleasant. Liquidity is already dwindling in the riskiest sectors of the economy, from high yield to crypto assets. By 2023, when the tightening truly begins, it will probably have reached the supposedly safer assets.
In a recent interview, Bundesbank President Joachim Nagel said that the ECB will begin to reduce its balance sheet in 2023 and added that “a recession may be insufficient to get inflation back on target.” This suggests that the “anti-fragmentation tool” currently in use to mask risk in periphery bonds may begin to lose its placebo impact on sovereign assets. Additionally, the cost of equity and weighted average cost of capital increases as soon as sovereign bond spreads begin to rise.
Capital can only be made or destroyed; it never remains constant. And if central banks are to effectively fight inflation, capital destruction is unavoidable.
The prevalent bullish claim is that because central banks have learned from 2008, they will not dare to allow the market to crash. Although a correct analysis, it is not enough to justify market multiples. The fact that governments continue to finance themselves, which they will, is ultimately what counts to central banks. The crowding out effect of government spending over private sector credit access has never been a major concern for a central bank. Keep in mind that I am only estimating a $5 trillion unwind, which is quite generous given the excess produced between 2008 and 2021 and the magnitude of the balance sheet increase in 2020–21.
Central banks are also aware of the worst-case scenario, which is elevated inflation and a recession that could have a prolonged impact on citizens, with rising discontent and generalized impoverishment. They know they cannot keep inflation high just to satisfy market expectations of rising valuations. The same central banks that assert that the wealth effect multiplies positively are aware of the disastrous consequences of ignoring inflation. Back to the 1970s.
The “energy excuse” in inflation estimates will likely evaporate, and that will be the key test for central banks. The “supply chain excuse” has disappeared, the “temporary excuse” has gotten stale, and the “energy excuse” has lost some of its credibility since June. The unattractive reality of rising core and super-core inflation has been exposed by the recent commodity slump.
Central banks cannot accept sustained inflation because it means they would have failed in their mandate. Few can accurately foresee how quantitative tightening will affect asset prices and credit availability, even though it is necessary. What we know is that quantitative tightening, with a minimal decrease in central bank balance sheets, is expected to compress multiples and valuations of risky assets more than it has thus far. Given that capital destruction appears to be only getting started, the dividing effect is probably more than anticipated. And the real economy is always impacted by capital destruction
The Holiday Weeks Ahead are Likely to Include Lighter Trading Volumes
End-of-year window dressing occurs when mutual funds and other managed money sell their losing stocks before December 31 to avoid sitting in front of trustees early in the new year and having these stocks still listed as holdings. This often has the effect of concentrating end-of-year selling in stocks that are already the worst performers over the ending year. These same stocks are then favored early in the new year. Keep in mind some of this money may temporarily move to the fixed-income markets. Volume for the next two holiday weeks is typically lighter than usual.
Speaking of bad-performing stocks, FedEx reports earnings on Tuesday, December 20 (4:30). If you recall, they last reported on September 15 and missed expected earnings. That earnings call caused the stock to move from $204 to $161 during the following trading session. FedEx earnings will be of particular interest for this reason and because it’s an early indicator of this holiday shopping season.
It’s a light week for economic numbers; those that have the strongest possibility of moving markets occur on Wednesday’s Consumer Confidence and Friday’s Durable Goods data. Friday is a regular trading day for the stock exchanges, the bond markets enjoy an early 2 PM close.
Monday 12/19
• 10:00 AM ET, the Housing Market Index is expected to show a 34, according to Econoday’s consensus numbers. This would halt the downward spiral of this measure. Last month the reading was 33.
Tuesday 12/20
• 8:30 AM ET, Housing Starts and Permits are expected to be 1.4 million from the previous 1.425 million. Residential construction has been slowing and slowing significantly.
Wednesday 12/21
• 8:30 AM ET, The third-quarter current account deficit is expected to narrow to $225.0 versus the $251.1 billion reported in the second quarter. The current account is a quarterly measure of the U.S. international balance in goods and services trade as well as unilateral transfers.
• 10:00 AM ET, Consumer Confidence is expected to edge higher to a marginally less depressed 101.0 versus November’s 100.2. Trends in consumer attitudes and spending can be one of the most impactful influences on the stock market. This is because strong economic growth translates to healthy corporate profits and higher stock prices.
Thursday 12/22
• 8:30 AM ET, Gross Domestic Product (GDP) third estimate for the third quarter is not expected to change at all from the previous estimate of 2.9%. This is the final read from the third quarter, it indicates we were not in a recession and instead had better growth than the first two quarters.
Friday 12/23
• 8:30 AM ET, Forecasters expect Durable Goods Orders to fall 0.7 percent in November following a 1.1 percent rise in October. This is a true leading indicator as orders for durable goods show how active factories will be in the months to come as manufacturers fill those orders. The data not only provide insight to demand items such as refrigerators and cars but also business investments such as industrial machinery, electrical machinery, and computers. So it may also indicate how confident the industry is for a period into the future.
What Else
Were you able to watch the equity analysts from Noble Capital Markets discuss stocks within their areas of expertise on Wall Street Wish List aired last Thursday through Channelchek? A replay may become available this week for those that wish to rewatch or those that prefer to digest all the information in smaller bites. Those signed up for emails from Channelchek will be given a heads-up when this replay happens.
Happy Hanukkah, Merry Christmas, and peace to all from the entire content team at Channelchek!
Fed Chairman Powell is Being Ignored by the Markets – What Next?
Is Fed Chairman Powell getting the George Costanza treatment from the bond market? I asked myself this as I listened to the Chair double down on his hawkishness yesterday while at the same time watching the bond market yawn. Rates were effectively unchanged out in the periods. It reminded me of the Seinfeld episode where George tells his girlfriend, point blank, I’m breaking up with you.” She simply replies, “No.” Similar to George, Powell’s wishes are not being recognized by the market which would be hurt by them. Today mortgage rates dropped along with treasury yields, this all makes Powell’s job tricky.
The FOMCs final episode of the 2022 season ended as expected with a 50 bp increase, and the Fed Chairman addressing reporters and trying to be taken seriously by the markets. Afterall, he can say he’s raising rates all he wants to slow growth, if lending rates don’t rise, the Fed doesn’t achieve its goal. Since October 24, the Fed has raised overnight rates 1.25%. As seen below in the chart, despite the increase from a 3% target to a 4.25% target (which is a 42% increase in bank lending rates), the ten year which is a benchmark for consumer lending rates, declined by 0.75% (which is an 18% decline).
Markets are forward looking. Currently they seem to be, more farsighted than usual. As Chairman Powell repeats after each increase that officials anticipate that “ongoing increases” in the Fed Funds rate will be “appropriate,” this would be expected by someone of Powell’s experience to cause the market to look toward rate increases and shift the yield curve higher. The Fed has done more than this. The official one-year-out Fed forecast is for the Fed funds rate to end 2023 at 5.1% and 4.1% for 2024. These were 4.6% and 3.9% previously. Mortgage rates today hit recent lows.
Meanwhile overnight interest rates this year have increased by 50 times from where they started (.08% to 4.00%). By comparison the benchmark Treasury was trading at 1.73% at the start of the year, so its level has gone up by two times.
But the current market has been so forward-looking in 2022, that each time the Fed puts on its hawkish face, the bond markets take it as more assurance that the U.S. will fall into a recession. They trade on the reassurance that the Fed will need to ease, and it effectively eases borrowing rates as benchmark yields decline. The bond and even stock markets expect the tightening to be transitory. They also only half listen to the Fed Chair because they know how wrong he was when he suggested inflation was transitory just one year ago.
CPI is also causing markets to be optimistic. Two consecutive consensus misses of inflation have led the participants to believe we are getting very close to the peak for interest rates, and rate cuts will soon be on the agenda. The Fed has been doing everything it can to change people’s minds.
The Fed’s View
While the market may be saying “no” and not allowing Powell to impose higher rates along the curve, the Fed certainly is going to keep trying. A 2% inflation target with inflation running approximately three times this won’t allow for an easing of policy. Even if overnight Fed Funds are so high that they are near historical norms.
For the Fed to accept what the market is pricing for, it will want to see substantial evidence that inflation is slowing. This will take more than just one or two months, where core inflation has come in less than the market was expecting. It isn’t an exact science to bring down inflation, but mathematically to get inflation to 2% YoY, over time, we need to see month-on-month readings averaging 0.17% MoM. We are not close, considering it is the core PCE deflator that the Fed pays the most attention to. In fact, the Fed just revised its inflation forecast upward because the core PCE deflator is likely to be stickier than core CPI. The revision has its core PCE estimate at 3.5% for the end of 2023 versus 3.1% previously, with 2024 revised up to 2.5% from 2.3%.
Take Away
What happens when monetary policy throws us huge increases in Fed Funds in seven out of its eight meetings, and late in the year, the interest rate markets decides, “No?”
It seems the Fed is working on its ability to jawbone rates higher. We saw this after the FOMC meeting with Powell doubling down on his rhetoric. We can expect more Fed addresses trying to move rates in a way that direct action concerning overnights has failed to accomplish. In the end, it’s the markets that set levels; if the bond market and stock market participants keep taking this hawkish language as recessionary, the hawkish stance could continue to backfire on the Fed.
Comments from Fed Chair Powell emphasized that the FOMC wants financial conditions to “reflect the policy restraint that we’re putting in place”. After all, inflation is indeed still running well above target, the jobs market and wage pressure remain hot, and activity data is pointing to a decent fourth-quarter GDP report after a healthy 2.9% growth rate in the third quarter. Will he succeed? If my memory serves me correctly, in the Seinfeld episode George wound up engaged to the woman he was breaking up with.
The FOMC Votes at Eighth 2022 Meeting to Raise Rates for Seventh Time
The Federal Open Market Committee (FOMC) voted to raise overnight interest rates from a target of 3.75%-4.00% to the new target of 4.25% – 4.50%. This was announced at the conclusion of the Committee’s final scheduled meeting of 2022. The monetary policy shift in bank lending rates was as expected by economists and the markets as Fed Chair Powell had recently spoke about less aggressive increases while maintaining a vigilance that would prefer to err on the side of being too hawkish.
The recent market focus has been on how inflation has been reported with lower price increases than before. While lower increases may suggest that inflation is successfully being wrung out of the system, Powell and other FOMC members have wondered aloud whether demand-driven inflation will take many more months to dampen.
There were few clues given in the statement about the size of any next move. While this can’t be known at this point, Powell generally shares during a press conference beginning at 2:30 his general perceptions and expectations. However, the median projection by members of where Fed Funds will stand this time next year is 5.10%, with seven out of the nineteen members expecting it to be higher. It is clear from the statement that the Fed expects ongoing increases.
Below are notable excerpts from the announcement of today’s change in monetary policy:
Fed Release December 14, 2022
Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.
Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are contributing to upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/4 to 4-1/2 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that was issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Take-Away
Higher interest rates can weigh on stocks as companies that rely on borrowing may find their cost of capital has increased. The risk of inflation also weighs on the markets. Additionally, investors find that alternative investments that pay a known yield may, at some point, be preferred to equities. For these reasons, higher interest rates are of concern to the stock market investor. However, an unhealthy, highly inflationary economy also comes at a cost to the economy, businesses, and households.
The market has been bringing rates down across the curve as the Fed has been working to increase them. The ten-year treasury note had traded near 4.25% in late October; it now hovers around 3.50%, or 50 bp below the bottom of the Fed’s overnight range. Is this sustainable? It certainly isn’t desirable for what the Fed is trying to accomplish. In these cases, the Fed tends to eventually win.
“Investors should not care whether the Fed pivots or not if they analyze investment opportunities based on fundamentals and not on monetary laughing gas,” writes economist Daniel Lacalle, PhD. In his latest article, published below. LaCalle takes on the journalists and economists that see market risk differently than himself. This is a thought-provoking read for anyone who has been living on a diet of mostly CNBC, and Yahoo Finance, as exposure to diverse market viewpoints is considered healthy. – Paul Hoffman, Channelchek
Obsessed Investors
In a recent Bloomberg article, a group of economists voiced their fears that the Federal Reserve’s inflation fight may create an unnecessarily deep downturn. However, the Federal Reserve does not create a downturn due to rate hikes; it creates the foundations of a crisis by unnecessarily lowering rates to negative territory and aggressively increasing its balance sheet. It is the malinvestment and excessive risk-taking fuelled by cheap money that lead to a recession.
Those same economists probably saw no risk in negative rates and massive money printing. It is profoundly concerning to see that experts who remained quiet as the world accumulated $17 trillion in negative yielding bonds and central banks’ balance sheets soared to more than $20 trillion now complain that rate hikes may create a debt crisis. The debt crisis, like all market imbalances, was created when central banks led investors to believe that a negative yielding bond was a worthwhile investment because the price would rise and compensate for the loss of yield. A good old bubble.
Multiple expansion has been an easy investment thesis. Earnings downgrades? No problem. Macro weakness? Who cares. Valuations soared simply because the quantity of money was rising faster than nominal GDP (gross domestic product). Printing money made investing in the most aggressive stocks and the riskiest bonds the most lucrative alternative. And that, my friends, is massive asset inflation. The Keynesian crowd repeated that this time would be different and consistently larger quantitative easing programs would not create inflation because it did not happen in the past. And it happened.
Inflation was already evident in assets all over the investment spectrum, but no one seemed to care. It was also evident in non-replicable goods and services. The FAO food price index already reached all-time highs in 2019 without any “supply chain disruption” excuse or blaming it on the Ukraine war. House prices, insurance, healthcare, education… The bubble of cheap money was clear everywhere.
Now many market participants want the Fed to pivot and stop hiking rates. Why? Because many want the easy multiple expansion carry trade back. The fact that investors see a Fed pivot as the main reason to buy tells you what an immensely perverse incentive monetary policy is and how poor the macro and earnings’ outlook are.
Earnings estimates have been falling for 2022 and 2023 all year. The latest S&P 500 earnings’ growth estimates published by Morgan Stanley show a modest 8 and 7 percent rise for this and next year respectively. Not bad? The pace of downgrades has not stopped, and the market is not even adjusting earnings to the downgrade in macroeconomic estimates. When I look at the details of these expectations, I am amazed to see widespread margin growth in 2023 and a backdrop of rising sales and low inflation. Excessively optimistic? I think so.
Few of us seem to realize a Fed pivot is a bad idea, and, in any case, it will not be enough to drive markets to a bull run again because inflationary pressures are stickier than what consensus would want. I find it an exercise in wishful thinking to read so many predictions of a rapid return to 2% inflation, even less, when history shows that once inflation rises above 5% in developed economies, it takes at least a decade to bring it down to 2%, according to Deutsche Bank. Even the OECD expects persistent inflation in 2023 against a backdrop of weakening growth.
Stagflation. That is the risk ahead, and a Fed pivot would do nothing to bring markets higher in that scenario. Stagflation periods have proven to be extremely poor for stocks and bonds, even worse when governments are unwilling to cut deficit spending, because the crowding out of the private sector works against a rapid recovery.
Current inflation expectations suggest the Fed will pivot in the first quarter of 2023. That is an awfully long time in the investment world if you want to bet on a V-shaped market recovery. Even worse, that pivot expectation is based on a surprisingly accelerated reduction in inflation. How can it happen when central banks’ balance sheets have barely moved in local currency, reverse repo liquidity injections reach trillion-dollar levels every month and money supply has barely corrected from the all-time highs of 2022? Many are betting on statistical bodies tweaking the calculation of CPI (consumer price index), and believe me, it will happen, but it will not disguise earnings and margin erosion.
To cut inflation drastically three things need to happen, and only one is not enough. 1) Hike rates. 2) Reduce the balance sheet of central banks meaningfully. 3) Stop deficit spending. This is unlikely to happen anytime soon.
Investors that see the Fed as too hawkish look at money supply growth and how it is falling, but they do not look at broad money accumulation and the insanity of the size of central banks’ balance sheets that have barely moved in local currency. By looking at money supply growth as a variable of tightness in monetary policy they may make the mistake of believing that the tightening cycle is over too soon.
Investors should not care whether the Fed pivots or not if they analyze investment opportunities based on fundamentals and not on monetary laughing gas. Betting on a Fed pivot by adding risk to cyclical and extremely risky assets may be an extremely dangerous position even if the Fed does revert its pace, because it would be ignoring the economic cycle and the earnings reality.
Central banks do not print growth. Governments do not boost productivity. However, both perpetuate inflation and have an incentive to increase debt. Adding these facts to our investment analysis may not guarantee high returns, but it will prevent enormous losses.
Arguments Can be Made for Rates Being Too Low and for Rates Being Too High
The Federal Reserve has raised the Fed Funds rate from an average of 0.08% in January 2022 to its current 4.05%, and a likely adjustment to 4.25% to 4.50% tomorrow. Inflation, as measured by CPI and even the Fed’s favorite, the PCE deflator, has been showing a decreasing rise in prices. So investors within all affected markets are asking, how much more will the Fed raise rates? Ignoring any suggestion that “this time it’s different,” I looked at US interest rates and inflation going back to 1962 and may have found enough consistency and historical norms to help determine what to expect now and why.
Are Increases Nearing an End?
I’ll start with the conclusion. The data suggests that the movement of market rates depends on whether higher current inflation is being caused by temporary or long-lived factors. The 10-year Treasury Note market believes current inflation is mostly temporary. This is shown by its yield, having touched 4.25% in late October, and then falling. The ten-year is now near 3.50%, despite the 0.75% increase in overnight rates implemented on November 2. If the combined wisdom of the Treasury market is reliable, this suggests FOMC rate increases are nearing an end. Perhaps one more smaller hike and then a wait-and-see period. The Fed would then monitor prices while past increases work their way through the economy.
Powell’s Concerns
At his last address on November 30th, Fed Chair Jay Powell indicated he’d rather go too far (with tightening) and then reignite the economy rather than err on the side of not doing enough and having a bigger problem. The markets and the media largely ignored this, but it’s important to know what the Fed Chair believes is prescient and is sharing publicly. Powell also said, “Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.” And then he said something very telling, Powell added, “It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”
Market Thinks Inflation is Temporary
But, the markets are overjoyed by the last two months of inflation data. Despite what the nations top central banker is saying. Markets may be right, but if they are wrong (bond and stock markets) spotting it early can help stave off losses. If inflation, which is lower than it had been, but not historically low, proves more permanent, for example, if employers continue to have to bid up the price of workers, and demand for goods causes commodity prices to rise, then the Fed will have paused too early. This will lead to a more difficult challenge for the Fed as compared to tightening too much. The data used in this article are from the Federal Reserve Economic Data (FRED) maintained by the Federal Reserve Bank of St. Louis.
Actual and Expected Inflation
The St. Louis Federal Reserve publishes a market estimate of expected average inflation over the next ten years. It is derived from the 10-year Treasury constant maturity bond and 10-year Treasury inflation-indexed constant maturity bond. It was first published in 2003. Over 2003-2021, 10-year inflation expectation averaged 2.0%, the same as GDP deflator inflation. During the second quarter of 2022, the expected 10-year inflation was 2.7%, or less than 1.0 percentage point above its 2003-2021 average. In contrast, GDP deflator inflation was 7.6%. A significant wedge exists between current and expected inflation.
Source: St. Louis Fed
The breakeven inflation rate represents a measure of expected inflation derived from 10-Year Treasury Constant Maturity Securities (BC_10YEAR) and 10-Year Treasury Inflation-Indexed Constant Maturity Securities (TC_10YEAR). The latest value implies what market participants expect inflation to be in the next 10 years, on average.
Beginning with the end of the last recession on April 1, 2020, the Treasury bond data used in calculating interest rate spreads is obtained directly from the U.S. Treasury Department.
Take Away
The Market’s expectation of 10-year average inflation is dramatically different from current inflation, even at inflation’s new lower pace. This implies the market believes it to be temporary.
If the market’s expectation of inflation is accurate, there is an average difference between Fed Funds and the PCE deflator of 1.6% (since 1962). The last read on PCE was October 2022 at 6%. Reducing this by 1.6 would provide a Fed Funds level of 4.4%. This level is in line with historic averages and likely where we will be after the FOMC meeting wraps up on December 14. This comparatively high rate relative to where we began the year may be considered neutral.
Will the Fed stop at neutral? Are the markets right? Powell said he’d rather err on the side of going beyond what is needed, which suggests the Fed will continue some. As for the markets, being on the side of the markets is how you make money, but getting out before trouble arises is how you keep the money. Markets are not always accurate forecasters and since economic behavior and debt levels tend to adjust slowly, prudent portfolio management suggests it is wise to keep an eye out for today’s interest rates still being too low.
Fed Wants Inflation to Get Down to 2% – But Why Not Target 3%? Or 0%?
What’s so special about the number 2? Quite a lot, if you’re a central banker – and that number is followed by a percent sign.
That’s been the de facto or official target inflation rate for the Federal Reserve, the European Central Bank and many other similar institutions since at least the 1990s.
But in recent months, inflation in the U.S. and elsewhere has soared, forcing the Fed and its counterparts to jack up interest rates to bring it down to near their target level.
This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of, Veronika Dolar, Assistant Professor of Economics, SUNY Old Westbury.
As an economist who has studied the movements of key economic indicators like inflation, I know that low and stable inflation is essential for a well-functioning economy. But why does the target have to be 2%? Why not 3%? Or even zero?
Soaring Inflation
The U.S. inflation rate hit its 2022 peak in July at an annual rate of 9.1%. The last time consumer prices were rising this fast was back in 1981 – over 40 years ago.
Since March 2022, the Fed has been actively trying to decrease inflation. In order to do this, the Fed has been hiking its benchmark borrowing rate – from effectively 0% back in March 2022 to the current range of 3.75% to 4%. And it’s expected to lift interest rates another 0.5 percentage point on Dec. 14 and even more in 2023.
Most economists agree that an inflation rate approaching 8% is too high, but what should it be? If rising prices are so terrible, why not shoot for zero inflation?
Maintaining Stable Prices
One of the Fed’s core mandates, alongside low unemployment, is maintaining stable prices.
Since 1996, Fed policymakers have generally adopted the stance that their target for doing so was an inflation rate of around 2%. In January 2012, then-Chairman Ben Bernanke made this target official, and both of his successors, including current Chair Jerome Powell, have made clear that the Fed sees 2% as the appropriate desired rate of inflation.
Until very recently, though, the problem wasn’t that inflation was too high – it was that it was too low. That prompted Powell in 2020, when inflation was barely more than 1%, to call this a cause for concern and say the Fed would let it rise above 2%.
Many of you may find it counterintuitive that the Fed would want to push up inflation. But inflation that is persistently too low can pose serious risks to the economy.
These risks – namely sparking a deflationary spiral – are why central banks like the Fed would never want to adopt a 0% inflation target.
Perils of Deflation
When the economy shrinks during a recession with a fall in gross domestic product, aggregate demand for all the things it produces falls as well. As a result, prices no longer rise and may even start to fall – a condition called deflation.
Deflation is the exact opposite of inflation – instead of prices rising over time, they are falling. At first, it would seem that falling and lower prices are a good thing – who wouldn’t want to buy the same thing at a lower price and see their purchasing power go up?
But deflation can actually be pretty devastating for the economy. When people feel prices are headed down – not just temporarily, like big sales over the holidays, but for weeks, months or even years – they actually delay purchases in the hopes that they can buy things for less at a later date.
For example, if you are thinking of buying a new car that currently costs US$60,000, during periods of deflation you realize that if you wait another month, you can buy this car for $55,000. As a result, you don’t buy the car today. But after a month, when the car is now for sale for $55,000, the same logic applies. Why buy a car today, when you can wait another month and buy a car for $50,000 next month.
This lower spending leads to less income for producers, which can lead to unemployment. In addition, businesses, too, delay spending since they expect prices to fall further. This negative feedback loop – the deflationary spiral – generates higher unemployment, even lower prices and even less spending.
In short, deflation leads to more deflation. Throughout most of U.S. history, periods of deflation usually go hand in hand with economic downturns.
Everything in Moderation
So it’s pretty clear some inflation is probably necessary to avoid a deflation trap, but how much? Could it be 1%, 3% or even 4%?
Maybe. There isn’t any strong theoretical or empirical evidence for an inflation target of exactly 2%. The figure’s origin is a bit murky, but some reports suggest it simply came from a casual remark made by the New Zealand finance minister back in the late 1980s during a TV interview.
Moreover, there’s concern that creating economic targets for economic indicators like inflation corrupts the usefulness of the metric. Charles Goodhart, an economist who worked for the Bank of England, created an eponymous law that states: “When a measure becomes a target, it ceases to be a good measure.”
Since a core mission of the Fed is price stability, the target is beside the point. The main thing is that the Fed guide the economy toward an inflation rate high enough to allow it room to lower interest rates if it needs to stimulate the economy but low enough that it doesn’t seriously erode consumer purchasing power.
FOMC Meeting and “Wall Street Wish List” May Impact Your Portfolio Most
Is the Fed really tightening lending rates to cool the economy? Because consumer rates have been headed lower since October. This last FOMC meeting of 2022 may help the markets to understand that something has to give. A 7.7% y-o-y CPI, a 3.75-4.00% Fed Funds target, and a 3.45% 20-year constant maturity treasury can not co-exist for long. Treasury investors either need to earn more to keep up with expected inflation realities, inflation needs to show a more certain downtrend or the Fed needs to go back to lowering Fed Funds levels. Having lived through the last three years of markets, which I can attest from experience, are very different from the previous 30 years, I’m still putting my money on what the Fed Chairman tells us he’s doing. However, markets being what they are will move with the moves of the masses, and that is what’s “right” because that is what makes money.
The December FOMC meeting is front and center this week. We also get a new CPI report pre-meeting. Expect volatility, especially with longer-term treasuries already priced for a great CPI number.
2:00 PM ET, Treasury Statement, forecasters see a $200.0 billion deficit in November that would compare with a $191.3 billion deficit in November a year ago and a deficit in October this year of $87.8 billion. The government’s fiscal year began in October. The size of the budget deficit is important because it impacts the amount of treasury issuance, and then supply and demand take over in terms of interest rates demanded to fill the supply.
Tuesday 12/13
6:00 AM ET, Optimism is expected to remain low. The small business optimism index has been below the historical average of 98 for ten months in a row and deeply so in October at 91.3. November’s consensus is 90.8.
8:30 AM ET, CPI for November is the first information with potential market-altering data to be released this week. It will be the last look at CPI for a month during 2022. CPI is expected to be 0,% for the month or 7.3% y-o-y. Do you remember how the market rallied on the better than the consensus 7.7% last month? Any deviation from the consensus could cause an impact.
Wednesday 12/14
8:30 AM ET, Atlanta Fed Business Inflation Expectations for December. While we have no consensus data, The Atlanta Fed’s Business Inflation Expectations survey came in last month at 3.3% expected. The survey number provides a monthly measure of year-ahead inflation expectations and inflation uncertainty from the perspective of firms. The survey also provides a monthly gauge of firms’ current sales, profit margins, and unit cost changes.
2:00 PM ET, FOMC Announcement, let the trading week unofficially begin as markets shuffle with new information from the 2:00 PM announcement and press conference that follows. After a series of 75 bp moves, the Fed is expected to be less aggressive with a 50 bp increase.
Thursday 12/15
8:30 AM ET, Jobless Claims for the December 10 week are expected to come in at 230,000, or unchanged from the prior week. A large deviation from this number could move markets as employment is a Fed mandate.
9:00 AM ET, Wall Street Wish List. Seasoned Analysts from Noble Capital Market’s veteran team discuss the sectors and companies they cover and perhaps provide actionable ideas as to where they may lean in the year ahead. Information for free online event is here.
Friday 12/16
9:45 AM ET, PMI Composite Flash. At 46.2 in November, the services PMI has been sinking deeper into contraction though expectations for December’s flash is a little slower pace of contraction at 46.5. Manufacturing, at 47.7 in November, is expected little changed at 47.8.
What Else
The weekly focus is on the FOMC decision and press conference. Register for Channelchek emails and receive our synopsis of the FOMC outcome immediately post announcement.
It may turn out that the Wall Street Wish List is the most profitable sharing of ideas that you receive headed into the new year. Don’t miss this by clicking on the banner below to allow you free access.
Will Russia Make the EU an Acceptable Counter Offer?
On Sunday, OPEC+ voted to maintain the previous level of output. This is known in OPEC vernacular as a “rollover,” it will allow the group time to experience and assess the market impact of the price cap of $60 a barrel on Russian oil. The $60 EU price cap is scheduled to begin Monday, December 5th.
Otherwise, it will be a quiet week in terms of data and Fed governor speeches. After a flurry of talks out of Fed executives last week, mostly pointing to a tapering of increases, the Fed is now in a blackout period until after the December 13-14 meeting and announcement.
Monday 12/5
9:45 AM ET, PMI Composite Final Consensus Outlook A little less contraction is the call for the PMI Service’s November final, at a consensus of 46.3 versus 46.1 at mid-month.
10:00 AM ET, Factory Orders are seen rising to a 0.7 percent gain in October. This would follow a 0.4 percent gain in September. The upward adjustment is in part due to Durable Goods orders for October, which have already been released and are one of two major components of this report. Durable Goods rose 1.0 percent in the month, which was stronger than expected. Factory Orders are a true leading indicator of future economic activity.
10:00 AM ET, ISM Services Industries has been slow, having reported 54.4 in October and expectations of 53.5 for November.
Tuesday 12/6
8:30 AM ET, International Trade in Goods and Services, a deficit of $80.0 billion is expected in October for total goods and services, which would compare with a $73.3 billion deficit in September. Advance data on the goods side of October’s report showed a more than $7 billion deepening in the deficit.
Wednesday 12/7
7:00 AM ET, MBA Mortgage Applications are expected to show that the composite index down 0.8%, the purchase index has gained 3.8%, and the refinance index is down 12.9%. The MBA compiles various mortgage loan indexes. The purchase applications index measures applications at mortgage lenders. This is a leading indicator for single-family home sales and housing construction, along with related industries that are impacted by a changing housing market.
8:30 AM ET, Productivity and Costs for third-quarter are expected to show non-farm productivity rising 0.4 percent versus a scant 0.3 percent annualized gain in the first estimate. Unit labor costs, which slowed from 8.9 percent in the second quarter to 3.5 percent in the first estimate for the third quarter, are expected to rise at a 3.3 percent rate in the second estimate.
10:30 AM ET, EIA Petroleum Status report. The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the U.S., whether produced here or abroad. The level of inventories helps determine prices for petroleum products.
3:00 PM ET Consumer credit is expected to increase $27.3 billion in October versus a $25.0 billion increase in September. Changes in consumer credit indicate the state of consumer finances and signal future spending patterns. The report includes credit cards, vehicle loans, and student loans; mortgages are not included.
Productivity measures the growth of labor efficiency in producing the economy’s goods and services. Unit labor costs reflect the labor costs of producing each unit of output. Both are followed as indicators of future inflationary trends
Thursday 12/8
8:30 AM ET, Jobless Claims for the December 3 week are expected to come in at a 228,000 four-week moving average, versus 225,000 in the prior week. Employment is one of the Fed’s mandates; as such, any number that significantly varies from consensus could alter the market’s thinking.
10:00 AM ET, ISM Manufacturing Index was 50.2 in October; the ISM Manufacturing Index has been gradually slowing to nearly breakeven. November’s consensus is 49.9.
10:00 AM ET, Construction spending is expected to fall 0.2 percent in October. This would be dramatic relative to September’s modest 0.2 percent gain.
10:30 AM ET, The Energy Information Administration (EIA) provides weekly information on natural gas stocks in underground storage for the U.S. and five regions of the country. The level of inventories helps determine prices for natural gas products.
4:30 PM ET, The Fed’s balance sheet is a weekly report presenting a consolidated balance sheet for all 12 Reserve Banks that lists factors supplying reserves into the banking system and factors absorbing reserves from the system. The report is officially named Factors Affecting Reserve Balances, otherwise known as the “H.4.1” report; investors have taken a recent interest in this weekly report as it shows if the Fed is on track with quantitative tightening plans.
Friday 12/9
8:30 AM ET, Producer Price Index or PPI, after moderating in October, PPI is expected to rise 0.2 percent on the month in November and 7.2 percent on the year. These would compare with 0.2 and 8.0 percent in October, which were both lower than expected. When excluding food and energy, prices are expected to also rise 0.2 percent on the month and 5.9 percent on the year.
10:00 AM ET, Consumer Sentiment is expected to remain unchanged at 56.8 after a rebound in November’s final report.
10:00 AM ET, Wholesale Inventories (second estimate for October) is expected to be unchanged from the first estimate at 0.8%.
What Else
The focus until mid-month is likely to be how interest rate markets trade with a new sense that the Fed is slowing its tightening pace. Also in high focus this week, markets are expected to pay attention to how oil prices play out with the EU plan and perhaps a forthcoming Russian proposal.
Employers Added 263,000 Jobs in November, How this Impacts Future Fed Decisions
There were many more jobs created and filled in the U.S. during November than expected. This may, on the surface, seem like a good thing for the economy, markets, and job seekers. But any expectation that the Fed is past the tipping point and is winning in the battle against conditions that increase prices will have to be curbed for a while.
The number of new hires points to unmet demand in filling positions, and the increase in wages directly adds to the cost of goods sold. Unmet high labor demand is inflationary and part of why the Fed is clear that it is not done.
Fed Chair Powell spoke last Wednesday in a lengthy address outlining the challenges that face the Fed and the avenues it is most likely to take. There is nothing in the strong November jobs report that alters what Powell has said. In fact, it may underscore the resiliency of the economy that the Fed is looking to temper. If you weren’t of the belief that the Fed would push Fed Funds beyond 5%, there is evidence that the Fed may need three 0.50% increases or more before it steps back.
Background
The Fed Chair and other Fed officials have reiterated in recent days that they are likely to lift rates and hold them at levels high enough to slow economic activity and hiring to bring inflation down from 40-year highs.
The just-released employment report for November was expected to come in far below the level reported. Digging even deeper into the numbers, it showed continued rampant hiring and elevated wage growth. The Fed had been hoping to keep a wage-price spiral at bay and get ahead of the supply-demand issues pushing wages and prices up.
The November Unemployment Report
The headline number showed that employers added 263,000 jobs in November while the unemployment rate held steady at 3.7%. But the revised wage data in Friday’s release could concern Fed officials because it points to an acceleration in pay gains in recent months. For the three months that ended in November, average hourly earnings rose at a 5.8% annualized rate. This is a surprising increase from an initially reported 3.9% annualized rate for the three months that ended in October. Economists had expected the U.S. economy had gained 200,000 jobs last month.
At the same time, senior Fed officials have made sure it is no surprise if they lessen the size of rate increases in coming meetings. The next FOMC is the Dec. 13-14 meeting; the Fed is expected to move 0.50% rather than another 0.75%.
Most major stock market indices have traded lower, taking a bearish tone from the report and signs the Fed still is a little behind in its effort to squelch inflation-feeding activity.
Of interest to investors, the sectors with the most job gains were the leisure and hospitality and healthcare industries, both of which had been hard hit during the pandemic, and in government, where employment levels are still 2% below where they stood in February 2020.
Take Away
“To be clear, strong wage growth is a good thing,” Powell said this week. “But for wage growth to be sustainable, it needs to be consistent with 2% inflation.”
The accelerated pace of job growth in November, coupled with upwardly revised October statistics, makes clear to the markets the persistent challenge facing the Federal Reserve. The central bank has repeated that it needs to see some slack in the labor market in order for inflation to fall. This could come from reduced labor demand or increased labor supply, or both.
The Odds May Again be Stacked on the Side of a Prolonged Oil Price Rally
Oil markets and the related energy industry have been cheered this year as the one clear winner, yet within the past few days, crude has brushed up against its low recorded at the start of 2022. The commodity has since bounced, and there are at least four reasons to believe that it will continue to rally.
On Wednesday, November 30, news that China will take steps to ease lockdown restrictions, a drop in U.S. oil supplies, a weaker U.S. dollar, and a signal of OPEC+’s intentions helped push crude prices up by more than 3.5%.
China
Major Chinese manufacturing cities are lifting Covid lockdowns, including the financial hub Shanghai and Zhengzhou (the location of the world’s largest iPhone factory). Renewed expectations that China’s economy may strengthen after being held back by restrictions on movement to contain Covid-19 helped lift prices. After lockdown protests last weekend, Chinese authorities reported fewer cases of the virus on Tuesday. Guangzhou, a city in the south of the country, relaxed some rules on Wednesday. Increased economic activity in China could come at a pace that dramatically increases the demand for oil and related products.
US Supply
U.S. petroleum stockpiles declined by 7.9 million barrels last week, according to reports from the American Petroleum Institute. Official figures from the U.S. Energy Information Administration (EIA) shown below indicate a declining trend that is unsustainable and will soon need to be turned around.
Source: EIA
The decline in the days supply is effectively borrowing against future stockpiles as there will need to be a time when this reverses, and more output-increasing stockpiles will add to demand on production.
U.S. Dollar
A weakening dollar has also helped enhance demand globally for crude by making contracts priced in the U.S. currency more affordable for overseas buyers. The dollar index, a measure of strength against a basket of six other major trading currencies, slipped 0.3% on Wednesday. It’s down about 5% in the past month.
While the effect of this FX change may not be felt by U.S. buyers, the added demand by requiring less local currency to translate into dollars effectively creates demand by virtue of its lower cost.
Source: Koyfin
OPEC+
The Saudis had been considering increasing their output to help soften price pressures and increase availability. This would occur when the cartel meets this weekend to decide output levels. It is reported that the meeting will not be in-person. When OPEC+ agrees to meet virtually, it tends to indicate they are not discussing any major changes to output targets.
Expectations of an increase in output had been built into the price; the new expectations are putting upward pressure on crude.
Take Away
A number of factors have caused crude to trade off since late Spring. A number of forces are now stacked up that could push crude levels back upward. These include fewer lockdowns in China, a declining U.S. supply, the added global demand that will be attracted by a weakening dollar, and the new realization that members of OPEC+ are not likely to increase output limits. Additionally, there has been a looming concern as to how much supply will be taken offline with price limits that are to be placed on purchases of Russian oil early next week.
Retailers May See More Red After Black Friday as Consumers Say They Plan to Pull Back on Spending
Retailers are gearing up for another blockbuster holiday shopping season, but consumers burned by the highest inflation in a generation may have other ideas.
Industry groups are predicting another record year of retail sales, with the National Retail Federation forecasting a jump of 6% to 8% over the US$890 billion consumers spent online and in stores in November and December of 2021.
But Jeff Bezos, founder and chairman of the biggest retailer of them all, seems to be anticipating a much less festive holiday for businesses. In November 2022, Amazon said it is laying off 10,000 workers, one of several big companies announcing job cuts recently. Bezos even cautioned consumers to hold off on big purchases like cars, televisions and appliances to save in case of a recession in 2023.
This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts ofAyalla A. Ruvio, Associate Professor of Marketing and the Director of the MS of Marketing Research program, Michigan State University and Forrest Morgeson, Assistant Professor of Marketing, Michigan State University.
Results from our new survey suggest consumers appear to be already taking Bezos’ advice, as a combination of soaring consumer prices, rising borrowing costs and growing odds of a recession weighs on their wallets. And if our survey results do pan out, it may mean the recession everyone’s worried about happens sooner than expected.
Crisis Behaviors
We conducted our survey in mid-November, about a week before Black Friday, the historical start of the holiday shopping season. The day after Thanksgiving is known as Black Friday because it signals the period when retailers hope to sell enough goods so that their income statement shows “black,” or profit, for the year rather than “red,” which refers to losses.
We asked over 500 consumers a series of questions about their spending plans, concerns and priorities during this year’s holiday season. Participants were split evenly between men and women, and almost two-thirds had a household income of $70,000 or less.
Overall, the most alarming conclusion from our research is that consumers are reporting consumption behaviors typically exhibited during an economic crisis, similar to those observed in 2009 by consultancy McKinsey during the Great Recession.
One data point stands out: An overwhelming 62% said they were concerned about their job security, while almost 35% indicated they were “very” or “extremely” worried about their financial situation.
Here are three behaviors we found in our survey that suggest consumers are behaving as if the U.S. economy is already in a recession.
1. Spending Less
Not surprisingly, cutting spending is the first thing consumers do during economic turmoil.
A study by McKinsey in early 2009 found that 90% of U.S. households cut spending due to the Great Recession, with 33% of consumers indicating a significant cut.
Similarly, respondents to our survey said they plan to spend, on average, around $700 this holiday season, substantially lower than the roughly $880 consumers spent during each of the past three seasons – including early in the pandemic in 2020.
About a third of our sample intended to spend “slightly” or “much” less than in 2021, while 35% said they would spend “about the same” – which from a retailer’s perspective means spending less because last year’s dollars don’t go as far today. The rest said they planned to spend a little or much more.
Inflation is one of the key reasons consumers say they are spending less. Almost 80% of respondents said they are either moderately, very or extremely concerned about the surge in prices, and 87% said those concerns would affect their holiday spending behavior, such as by buying gifts for fewer people or purchasing less expensive items.
Some of our respondents even said they were planning to make their own gifts or buy used goods, rather than shop for new items. The secondhand market has boomed in the last few years, and many shoppers view this option as a way to combat inflationary pressures.
2. Planning Ahead
Another thing consumers do when they sense a troubled economy is they plan their purchases more carefully and maintain self-control over spending.
Common strategies include spending more time searching for the best deals, adhering to strict shopping lists, prioritizing necessities and making purchases earlier to spread out their spending – all of which were mentioned by our survey respondents.
We may already be seeing signs of this last strategy. Retail sales for October were up 1.3% from the previous month and up 8.3% from October 2021, which may reflect consumers’ early holiday shopping. If that is the case, this early shopping may result in slumping sales in December.
Also, purchasing early, aided by the plethora of steep discounts offered well in advance of Black Friday, allows consumers to control their shopping behavior better and reduces the risk of impulse buying. Reduction of impulse buying is a strong indicator that consumers are shopping like the economy is in recession.
In our survey, we found that over 50% of participants said that they would be using savings to cover the cost of holiday spending, with many stressing that they would pay with cash. Using cash as a primary form of payment is the main tool consumers have to control spending.
Only 15% of our respondents said that they would use buy-now-pay-later options, which to us is another sign that consumers are preferring cash over forms of credit that creates a new debt.
3. Hypersensitivity to Price
During economic crises, consumers become hypersensitive to prices, which trump most other considerations in the minds of consumers.
A whopping 90% of our respondents confirmed that price is their major consideration when shopping during the holidays this year. Other elements of price sensitivity are free shipping, product value and the level of discount, if any.
The singular focus of consumers on price gives retailers a wide range of potential responses, including promoting house brands and private labels that are perceived as having greater value for money. In fact, according to the 2009 McKinsey report, one of the biggest shifts in consumer behavior during and after the 2008 recession was the switch in preference from high-priced premium brands to value brands that tend to have lower prices but still decent quality. During an economic slowdown, consumers typically stop buying brands they are not strongly connected with or loyal to.
Consumers in our survey said buying brand names will be one of the least important influences on their purchases this season.
While economists debate whether a recession is coming, or even whether the U.S. is already in one, our data suggests consumers are beginning to behave like one is already here. That risks becoming a self-fulfilling prophecy as consumers tighten their belts.
