Uncategorized

Weathering the storm

| May 31, 2019

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Since the trade negotiations between the U.S. and China broke off in early May, financial markets have taken the news hard.  Equity indices are down by more than 5%, Treasury yields have plunged and risk spreads have widened. In contrast, consumers so far appear to be taking the news with surprising calm. Various gauges of consumer attitudes held up reasonably well in May, which bodes well for a continuation of solid growth in consumer expenditures.

University of Michigan sentiment

Traditionally, between the two major monthly consumer confidence surveys from the Conference Board and the University of Michigan, the Michigan survey would be more likely to detect trade worries. It asks more questions about the general economic outlook and solicits more detail.  The preliminary May survey, which ran through about mid-May with at least half the responses coming after the initial breakdown in trade negotiations, revealed a jump in the headline sentiment gauge of roughly 5 points, bringing the index to 102.4, the best reading since 2004 (Exhibit 1).  However, the revised figure, incorporating responses gathered throughout May, was somewhat less positive at 100.0 (see Exhibit 1).  Even so, the headline gauge was up by nearly 3 points in May to a level just a point or so below the 2018 high.

Perhaps most surprisingly, it was the expectations component that drove the May advance, with the 1-year ahead economic outlook surging by 15 points and the 5-year ahead outlook rising by 12 points, a stark contrast to the thinking in U.S. financial markets.

Exhibit 1: University of Michigan sentiment index

Source: University of Michigan

The preliminary May University of Michigan report noted that the proportion of respondents citing tariffs peaked in July 2018 at 35% and has fallen since, hitting a recent low of 15% in April and only ticking up to 16% in early May.  However, the news headlines over the course of the month have begun to pierce the collective consciousness of consumers.  By the end of May, the University of Michigan reported that the percentage of respondents citing tariffs had jumped back to 35%, matching last year’s high.

Even so, consumers do not seem very worried about the economy.  Fifty-nine percent of respondents in May expected “good times” during the year ahead, the highest figure in over four years, while the proportion expecting an economic downturn in the next five years declined to 38%, the lowest reading since 2004.

In fact, University of Michigan survey respondents appeared more worried about the inflation impact of tariffs than the growth drag.  Inflation expectations for the year ahead jumped by 0.4 percentage points to 2.9%, with respondents who mentioned tariffs as a negative development having expectations that were a half percentage point higher than those who failed to cite tariffs.

Conference Board

The Conference Board survey is done monthly by mail.  The May results, published on May 28, had a cut-off date of May 16.  The Conference Board questions focus more on employment, and the composite index is typically less reactive to financial market moves or news such as the recent trade talks.

The Conference Board measure of consumer confidence also increased by about 5 points in May, building on a hefty gain in April.  The 10-point rebound in April and May almost fully retraced the deterioration in attitudes registered around the turn of the year (Exhibit 2).

In contrast to the University of Michigan details, the May Conference Board was driven mostly by more upbeat views on the current situation, with that component rising to the highest level since 2000.

Exhibit 2: Conference board consumer confidence

Source: Conference board

Bloomberg Consumer Comfort Index

The Bloomberg consumer comfort index provides an even timelier measure of consumer attitudes, as it is released weekly  as 4-week trailing averages.  This gauge, much like the higher-profile monthly indices, has performed well in May.

The latest reading, for the week ended May 26, advanced by half a point, the third consecutive weekly increase covering the entire period since the trade talks initially broke down.  The index has nearly rallied back to the 19-year high posted in early March (Exhibit 3).

Exhibit 3: Bloomberg consumer comfort index

Source: Bloomberg

No victory laps yet

The evidence so far is quite encouraging that the consumer is not going to be greatly affected by the trade news.  However, it is early yet.  The news headlines continue to expose households to the apparent deterioration in the prospects for a deal, so it would probably be wise to wait another month and see how attitudes evolve in June before declaring victory. The modest deterioration in the University of Michigan sentiment measure from mid-May to month-end certainly suggests that there is potential for attitudes to shift in June.

One reason to believe that consumers may be insulated from the trade talks, at least for now, is that the tariff hike on Chinese goods announced in May is mostly on industrial supplies and other goods purchased by businesses.  High-profile consumer items such as cell phones were purposefully left off the list when these tariffs were first implemented last year.  If the Trump Administration ultimately imposes tariffs on another large group of items, as has been threatened, then the consumer will likely begin to feel a little pain.  Likewise, the latest news of 5% tariffs on goods imported from Mexico, while unlikely to make much of a difference right away, could eventually start to bite if they are raised substantially.  Still, up to now, the Administration has sought to keep U.S. consumers out of the fray for the most part, and the latest consumer confidence data suggest that the effort has largely succeeded.

admin
john.killian@santander.us
1 (646) 776-7714

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles