The data's getting better but this Fed gauge is getting worse

FRI, JUN 14, 2019

YOUR AFTERNOON NEWS UPDATE AND MARKET ACTION FROM CNBC

AS OF FRI, JUN 14, 2019 • 12:07 ET

DJIA		26057.27
		-0.19%	-49.50

S&P 500		2882.53
		-0.31%	-9.11

NASDAQ		7790.54
		-0.59%	-46.59

EDITOR'S NOTE

Whaddaya know...the recession trade just came off the boil a bit.

In a slew of data releases this morning, we learned that retail sales have actually been really strong over the past three months, industrial production is recovering a bit, and consumer sentiment has hardly been dented by all the tariff and trade war talk.

The headline retail sales number rose 0.5% in May, somewhat less than expected. But the "control" group that tracks the consumption input to GDP more closely (it excludes auto sales, gasoline, food/restaurants, and building materials) was also up a healthy 0.5%. Moreover, April's same number was revised up from zero to a 0.4% gain! And March looks even better now, up 1.3%. All told, as J.P. Morgan points out, these sales are up more than 9% annualized for the March-April-May period!!

That's not sustainable, of course, but it doesn't have to be. It's enough to know that the slide in sales in the prior three months through February has been more than reversed, and aside from some weakness in CEO confidence and manufacturing surveys, there is scant evidence of a broader U.S. downturn. (J.P. Morgan, by the way, boosted its 2Q GDP estimate to 1.75% now after all this, up from 1% prior.)

You might think this all would spook markets to take off the rate cut trades they've been pricing in over the last couple months. But not so fast.

In the same University of Michigan consumer sentiment survey this morning that showed a healthy 98 reading, down from 100 the prior month, was the following nugget (scary music please...): consumers' inflation expectations over a five to ten year period dropped to 2.2%.

As Jim O'Sullivan points out, this is a new all-time low on a measure which had averaged 2.5% over the past three years. And if you're the Fed, this is the kind of stuff that keeps you up at night. Fed officials are terrified that low inflation expectations will become "anchored" and lead to a loss of confidence that central banks can combat deflation in the future (i.e., the dreaded "Japanification" issue).

Now, to me, it's one thing if people start actually expecting price (and, crucially, wage) declines during economic downturns, and quite another that people still expect 2%+ inflation during good times.

Regardless, this is still likely to keep the Fed--whose next rates decision is coming next week--in a more dovish mood for awhile, the other data notwithstanding.

See you at 1 p.m.!

Kelly

Kelly Evans

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