Commentary Directory

The Week Behind

If you were anywhere near economic news last week then you likely heard about the October CPI report which showed inflation at a red hot 6.2% YoY. It is getting increasingly difficult to make the argument that the accelerated growth in prices is "transitory" as many projections now see it persisting through to the middle of next year. Goods CPI and used car CPI both jumped again, up 1.0% MoM and 2.5% MoM, after appearing to cool in September. In essence, we've returned to where we were in the summer, but this time energy prices are up 30.0% YoY leading to an even higher headline number.

Following higher prices, investors responded in the bond market as a bearish week in trading saw shorter-term Treasury yields rising: the 2-year note closed around 52 basis points after opening the week around 42 basis points. This seems to be the Treasury yield that is responding the most to inflation volatility.

This is not necessarily a harmless phenomenon. The rise in short-term interest rates has outpaced longer-term interest rates like the 10-year yield. As a result, a famous recession indicator, the 10-year rate minus the 2-year rate, has begun to trend downward after peaking in March then October of this year. Two forces are behind this move. The main one is an elevated short-term inflation rate which has pushed investors to expect rising rates sooner than previously thought. Updated economic projections from the Fed in December could strengthen this force.

The other force pushing short-term yields closer to long-term yields is a growing feeling that supply chain disruptions could lead to "lost" growth instead of "delayed" growth. Take the often updated forecasts from Wells Fargo. In June, it forecasted growth of 7.3% in 2021 and 5.8% in 2022. As labor and goods shortages intensified, growth was downgraded for BOTH years, 5.5% in 2021 and 4.1% in 2022 per November projections. In total, Wells Fargo has taken off 3.5% worth of growth as a result of supply chain effects (see Chart of the Week). In recent months, the bank has initiated its forecast for 2023 growth around 3.3%, strong but nothing that suggests that robust post-pandemic growth has been delayed for two years.

The November UMich Index of Consumer Sentiment faceplanted to the lowest level in a decade at 66.8, drops of -6.8% MoM and -13.1% YoY, with inflation weighing on consumers' propensity to buy. Readings of current conditions and expectations both fell at a similar pace. With private consumption a key driver of growth, low consumer sentiment points to growth being more "lost" than "delayed" in the post-pandemic period. Losses in durable goods spending on homes and vehicles are set to intensify.

Last week seemed like a week of bad news and investors could feel it with bonds and equities on a small leg down. We've also seen the Biden administration's popularity take a dive to new lows. Only 41% of respondents give Biden their approval, down -11% from the Spring, and even Democrats' approval, which was at 94% in June, has started to turn, down to 80% in November. The US population is losing faith in institutions, and optimism is scarce. The sooner supply disruptions ease the better.

Chart of the Week

Based on Wells Fargo's US outlooks, the total amount of forecasted growth in 2021 and 2022 has been on the decline since June. In just 5 months, expected US GDP growth over the next two years has fallen -3.5%. Is this growth lost forever?

The Week Ahead

The Week Ahead: Retail sales and industrial production will make for a tense Tuesday as they will likely bring further context to supply disruptions' effects on the US. Outside of the US, the ONS will report on CPI. The consensus estimate sees CPI jumping to 3.9% YoY, up from 3.1% YoY. The BoE notably delayed a rate hike at its last meeting, and a CPI move like that would leave many questioning its policy path.