As expected, the markets saw increased volatility this week, particularly in the bond market. After last week’s hawkish non-farm payroll number, we got a dovish U.S. inflation report followed by a hawkish Fed meeting followed by a dovish PPI number. The 10-year Treasury yield turned volatile, bouncing around a range of nearly 30 basis points, but traders seemed mostly satisfied that rates will continue trending lower. As I wrote about this past week, I’m not convinced that the disinflation trend has resumed given the volatility of data on a month-over-month basis and the fact that other data points aren’t really confirming the CPI number, but a lack of progress on the economic front could keep moving bond prices higher.
Friday’s disappointing Michigan consumer sentiment report reiterated what we’ve already been seeing; consumers are getting anxious about persistent high prices and weakening incomes. While the high level economic numbers are holding up, we know that the “real economy”, conditions which affect the majority of U.S. households, have gotten worse. Real wage growth has only recently gotten better (and even that may have already run its course), housing is unaffordable for many and the high prices of many necessities have become unavoidable. There comes a time when consumers decide they’ve had enough and can no longer keep spending. I think that time may be getting near. Spending capacity has its limits and some of these sentiment surveys suggest the process is already beginning.
Keep reading with a 7-day free trial
Subscribe to The Lead-Lag Report to keep reading this post and get 7 days of free access to the full post archives.