Good morning. Today is the last day of winter. With the arrival of spring comes a gift to American capitalism and the American dream: the end of de facto fixed six per cent realtor commissions on home sales. The settlement of a lawsuit against the National Association of Realtors appears to have brought this outrageous bit of anti-competitive collusion to a halt, or at least made it harder. Send other reasons to be cheerful: robert.armstrong@ft.com.
The market doesn’t seem to care much about interest rates right now. This is interesting, because it was not very long ago — three or four months — that all anyone wanted to talk about, other than tech stocks, was the future trajectory of Fed policy. What is mildly alarming about this is that back when everyone wanted to talk about rates, the rates story was unambiguously positive. With inflation falling quickly, rates were sure to fall a lot. Now that inflation looks more stubborn and rates less sure to decline, the market has moved on to a different story, one about strong economic growth. That makes this look like a market that sees the good in everything.
Back in early January, the futures market placed a 85 per cent chance that there would be six or more quarter-point rate cuts by the end of the year, according to the CME’s FedWatch tool. Now the market suggests a 70 per cent chance there will be three or less. That’s a huge swing. The stock market has responded to the shock by rising a smooth seven per cent over the same period, reaching new all-time highs.
One appealing feature of the growth-is-good-so-higher-rates-are-fine story is that it is, for the time being, true. The belief in a simple correlation between lower rates and higher stock prices (or vice versa) is a mistake this newsletter never tires of correcting. When growth is good and earnings are strong, as it is in the US now, stocks can perfectly well rise against a background of flat or even rising rates. Indeed, that’s the ideal kind of market because it supports stocks but not a wild reach for yield, as Aswath Damodaran pointed out in his Unhedged interview last week:
A market with a T-bond rate of 4 per cent is much healthier than a market with a T-bond rate of 1.5 per cent. People don’t feel the urge to do stupid things . . . So the fact that the T-bond rate is 4 per cent is a good sign for the markets and for the economy. All this talk about “when will the Fed lower rates?” completely misses the point. This is where we ought to be.
In a piece (and a podcast discussion ) on this general topic, my colleague Katie Martin put the bull case as follows: “stocks are climbing not because they are huffing the speculative fumes of imminent and aggressive potential rate cuts but because they’re worth it.” Fair enough. The Atlanta Fed GDPNow estimate has the US economy expanding at 2 per cent in the first quarter, and there are few sounds of distress emanating from companies and households (few, not none; see next item).
The banal thing to say at this point is that strong growth won’t go on forever. Of course it won’t, no one is expecting it to, and stocks are not priced for it. When growth does slow, however, the attention of the market will return instantly to rates and the Fed. It is easy to assume that when growth slows the stubborn inflation problem will disappear and the Fed will be free to cut. But it’s not a safe assumption. If we have learned anything in the last three or four years, it’s that no one understands inflation well enough to predict it very well.
At any given moment there is a question bouncing around risk asset markets that can take almost any form, but always means the same thing: “might something awful be about to happen?” This doomy question’s most popular avatar at the moment is “are tech stocks in a bubble?” There is a smarter alternative: “what is the probability that inflation persists even as growth declines?”
Last week I wrote about a rare off-note in the otherwise harmonious US economy: the lower-income consumer. It’s a hard note to make out, though. The only really clear signs of it come from striking high delinquency rates among young borrowers, from the New York Fed’s Household Debt Report , and from various anecdotes from companies that serve lower income customers.
I’m not the only one listening. In the FT over the weekend, Alexandra White wrote about signs that consumers’ ability to absorb price increases might be at an end. She cites a soft January retail sales report which showed a slowdown from January to February; weakening survey measures of consumer sentiment; and lukewarm comments from executives at Kraft Heinz, Pepsi, McDonald's, and Target, among others. Over at the WSJ, Jinjoo Lee focused on the dollar stores chains — Dollar Tree and Dollar General — noting that the end of pandemic-era Federal supplements to state food stamp programs continue to pressure sales.
While I think there is something going on here, and that it could be quite important for investors, I want to be careful not to over-interpret the data or rely too much on comments from executives, who have all sorts of reasons for explaining corporate performance the way they do. Both of the big dollar store chains are in the midst of turnaround efforts, for example, which inevitably introduce some noise into financial results.
It is true, as White points out, that nominal retail sales growth has levelled off in the past few months, but the effects of inflation and pandemic turbulence make this hard to read — particularly in the specific context of low-income consumers. Consider for example inflation-adjusted personal consumption expenditures for goods and services:
Clearly there was a notable step down in January, but that is just one month. Putting January aside, there is no clear trend over the past couple of years, other than notably strong goods spending. In addition, wage growth continues to chug along well above 4 per cent in nominal terms, which does not suggest an enormous pinch on the average hourly worker.
It could be that the problems of less affluent households just don’t have a big enough impact to change the aggregate national numbers. I asked my former colleague Matt Klein of The Overshoot ( subscribe! ) about this; he is better at reading the national data than I will ever be. He noted that not only are retail sales volatile, but that goods spending (ex-energy) has been very high since the pandemic, and may be starting to normalise at last. If that is so, “the fortunes of specific consumer goods companies might not be representative of how consumers are doing. Even the aggregate retail sales numbers may not be particularly representative.”
He also pointed out that, within the Michigan consumer sentiment survey, it is notable that the proportion of consumers who expect their nominal income to increase in the next year is above average, and rising fast. The green line represents the proportion of Americans who think there is a 75 per cent chance their incomes will rise:
Klein agrees that poorer households’ troubles could be getting lost in the aggregate data, but says his “suspicion is that this reflects that people are actually doing pretty well”.
As so often when trying to feel out an inflection point in a big economy, we will have to find more data to suss out what is really going on at the low end. Readers, where should we be looking?
More on the basis trade.