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Commentary 2

Volume 26, Issue 21
May 23, 2022.
May 20
May 13
Net Weekly
Change %
DJIA 31,261.90 32,196.66 -934.76 -2.90%
Nasdaq 11,354.62 11,805.00 -450.38 -3.82%
S&P 500 3,901.36 4,023.89 -122.53 -3.05%
S&P/TSX Index 20,197.61 20,099.81 +97.80 +0.49%
Source: Globe & Mail

U.S. Consumer: Now it's Getting Serious
Sal Guatieri
BMO Senior Economist

Whether the U.S. economy slips into recession will ultimately come down to whether consumers stop spending. There was no sign of that in the latest retail sales report, but ominous clouds hint at the economy’s backbone coming under attack. Retail spending jumped 0.9% in April following even larger gains in the prior three months. However, much of the recent increase in retail receipts is price-related. In fact, the entire 12% annualized rise in receipts (excluding restaurants) in the past six months appears ‘unreal’, as consumer goods prices galloped somewhat faster. True, shoppers are spending more on services, which, apart from restaurant sales that jumped 20% in the past year, aren’t included in the retail report. But that doesn’t mean consumers will keep spending when pent-up demand for deferred trips and concert outings wanes.

There are three major strikes against consumers. Topping the list is raging inflation that's gobbling up a hefty chunk of wage gains. In fact, real disposable income per capita has fallen in seven of the past eight months, an alarming trend. Zeroing in on record gas prices, the 40% jump this year could squeeze household budgets by more than 1%. Piling on, the 5% rise in grocery bills could slice off another 0.4%. This means households, all else equal, need to cut purchases by 1½% just to afford costlier fuel and food.

The second strike against consumers is a fading wealth effect. U.S. household net worth soared a record 14% in 2021 after a double-digit gain in 2020, as cheap money stoked an asset price boom. The $19 trillion increase in wealth last year would have lifted spending by 4% assuming a 3% elasticity. While house prices aren’t falling (yet?), the pullback in equities could staunch the rise in wealth, cutting off a key pillar of support.

The third strike is higher interest rates. While just 9.3% of disposable income was required to cover debt payments in late 2021—two percentage points below the norm —this was before the massive run-up in borrowing costs. Consequently, financial strains are emerging. Equifax Inc. says that families with low credit scores are having more trouble making payments on consumer loans and credit cards. In addition, the interest-sensitive housing market is now cooling, flagging less spending on furniture, appliances, and other household items.

For now, consumers are hanging in. Next week’s April personal spending report will likely print a solid gain, even after inflation, keeping real spending growth on track for another 2-handle in the second quarter. It will take time for households to plow through a stash of excess savings, estimated at $2.4 trillion. That’s equal to 13% of personal disposable income, enough to fuel four years of normal annual spending gains. If the saving rate falls to half its average pre-pandemic level, as we expect, it could take more than four years to chew through this thick cushion. Of course, much of the extra funds will be used for other reasons, such as repaying debt or buying crypto. But even if just a quarter is used for spending, it will underpin consumers for at least another year.

Excess savings, rising wages, and pent-up demand are holding the consumer’s head above water, while the jobs market has rarely been stronger. But employment lags demand and will surely sag if consumers go into hibernation. A round of devastating earnings reports this week from the biggest retail names suggests shoppers are starting to crack under pressure. Soaring prices, the equity bear market and rapid[1]fire rate hikes are taking a toll, one that is likely to increase. Our in-house measure suggests overall financial conditions will weigh on economic growth later this year, though not as heavily as in past recessions. At least not yet. Most of the weight will fall squarely on the shoulders of consumers. Most jarring is that, if they sink, the cavalry won’t be riding to the rescue, as the Fed has gone all in on restoring price stability, come hell or high water.

Frank & Mark.

Source: Globe & Mail, BMO Capital Markets, Bank of Canada

Canadian stocks held up last week, with the TSX adding 0.5%. The outperformance was largely because of less exposure (and less weakness) to consumer stocks that got clobbered this week. And so the valuation reset continues.

Inflation in Canada didn’t let up at all in April, with the headline rising to a 39-year high of 6.8% y/y. Core inflation is not letting up either on a shorter-term basis, with price gains widespread across categories. So, on both sides of the border, central banks are still in a dogfight and we continue to see aggressive rate hikes through the summer. As Fed Chair Powell said this week, it is going to take “clear and convincing” signs that inflation is easing before central banks will back off their tightening stance. We’ll be waiting…

Elsewhere, tighter monetary policy is biting housing activity and prices, with sales in both Canada and the U.S. down meaningfully from their highs alongside higher mortgage rates.

YTD, the TSX is down 4.83% and the benchmark 10-year yield ended the week to yield 2.83%.

Equity markets continued to slump last week with little to change the narrative on stubborn inflation, tightening monetary policy and cooling growth. The S&P 500 fell 3.0% on the week, while the Nasdaq gave back another 3.8%. Regional Fed surveys were mixed, with Philly improving but Empire cooling on an ISM-adjusted basis—both are still in expansion territory. All in, unfilled orders and delivery times seem to be improving, at least a little bit.

Last week, saw number of key data releases in the U.S. and Canada. U.S. retail sales rose 0.9% as expected in April, though prior-month revisions were positive. But, month-to-moves are getting clawed back by inflation, and the 8.2% y/y gain just about matches the growth in headline CPI. So while the dollars are flowing, volumes are slowing. Earnings reports from Target and Walmart also caught the market’s attention this week, highlighting margin pressure from rising input costs, but also a sign that perhaps inventory stocking was overdone now that demand is cooling off. Consumer discretionary stocks in the S&P 500 are down 32% on the year, the worst performing sector of the market

YTD, the S&P 500 is down 18.14%, the Dow Jones Industrials are down 13.97%, and the Nasdaq is down 27.67%. The yield on the 10 year Treasury closed at 2.83%.

Source: BMO Capital Markets 

The Good:  Housing Starts +7.6% to 267,330 a.r. (Apr.); Construction Investment +1.8% (Mar.); Global Investors bought a net $46.9 bln in Canadian securities (Mar.).

The Bad:  Consumer Prices +6.8% y/y (Apr.)—broad-based gains; MLS Home Prices +23.8% y/y (Apr.); New House Prices +9.4% y/y (Apr.); Industrial Product Prices +16.4% y/y; Raw Materials Prices +38.4% y/y (Apr.); Existing Home Sales -12.6% (Apr.); Mortgage Credit +10.6% y/y (Mar.); Manufacturing Sales Volumes unch (Mar.); Wholesale Trade Volumes -0.6% (Mar.).

The Good:  Retail Sales +0.9% (Apr.); Industrial Production +1.1% (Apr.)—and Capacity Utilization +0.8 ppts to 79.0%; Philly Fed Index +0.2 pts to an ISM-adjusted 59.9 (May); Business Inventories +2.0% (Mar.).

The Bad:  Existing Home Sales -2.4% to 5.61 mln a.r. (Apr.); Housing Starts -0.2% to 1.724 mln a.r. (Apr.); Building Permits -3.2% to 1.819 mln a.r. (Apr.); NAHB Housing Market Index -8 pts to 69 (May); Empire State Manufacturing -8.4 pts to an ISM[1]adjusted 51.8 (May); Initial Jobless Claims +21k to 218k (May 14 week); Leading Index -0.3% (Apr.); Global Investors bought a net $20.2 bln in U.S. securities (Mar.)—slowed.

Top female competitive eater downs four KFC meals in 12 minutes
Eating quickly as a competitive sport? It’s a thing.

Apparently, filming it, is too.

Europe’s No. 1 female competitive eater Leah Shutkever, of Worcestershire, made her way through four KFC meals in 12 minutes, breaking a record, according to the New York Post.

“The aim of the game is to take this down as quickly and cleanly as I possibly can,” she says in a video clip posted to YouTube.

Shutkever, who has 27 official Guinness World Eating titles, frequently films her eating for Instagram, TikTok and YouTube channel, the latter which has over 322,000 subscribers.

or her latest effort, dubbed the “KFC box meal challenge,” Shutkever put back four KFC box meals with each having two chicken dishes and two sides and a grand total of 4,000 calories.

Shutkever said her goal was to improve her 2017 attempt, in which she ate the meals in just 23 minutes.

She managed to accomplish the latest challenge in 11 minutes and 58 seconds, breaking her previous record by more than 10 minutes.