May 10, 2023
A Bank of America consumer report for April showed total card spending per household fell -1.2% YoY, which is the first YoY decline since February 2021. The reports showed unemployment rising fastest among high-income households, and their spending growth on discretionary items has fallen below lower and middle-income households. Last week, an SF Fed report estimated that US consumers still have pandemic-era excess savings of ~$500B. The next high-frequency data point on US consumer spending will come from April-end earnings when HD reports on Tuesday, TGT on Wednesday and WMT Thursday.
Coming out of yesterday’s meeting both Biden and McConnell vowed that the US will not default. The easiest way to buy time would be for Biden to claw back unused stimulus money to fund the government. This could get the government to the June 15 corporate tax deadline, which should provide additional funding. Clawing back unused stimulus money is one of the features of McCarthy’s bill. Given still-elevated rates of core inflation, a result that includes less fiscal spending would be considered an equity-friendly outcome.
The S&P 500 remains in a narrow range between 4050 and 4150. Breaking above technical resistance at ~4200 likely requires a change in macro fundamentals, specifically a Fed pivot. History shows that a Fed pause can drive incremental equity upside when inflation rates are low. Unfortunately, the relationship breaks down when inflation is elevated. Monetary tightening works with a lag and the cumulative impact of rate hikes tends to come on suddenly. It’s also important to note the current Fed tightening campaign is the steepest and fastest on record. Equity markets often ‘look through the valley’ to an assumed Fed pivot, but the economic pain to induce a pivot seems to be underappreciated at the moment. It’s possible to avoid a period of acute pain, but it doesn’t seem likely given the Fed’s reliance on lagging indicators. At the end of prior tightening cycles, a positively-sloped 5/10 yield curve preceded a Fed pivot by several weeks. The 5/10 curve has barely made its way back to positive territory, but sustained levels above +19bp are required to confirm a change in trend.