What’s on your mind, American consumer?

Stocks had a mixed close yesterday in a low volume session in which traders struggled to find something to get excited about. The debt ceiling debate looms large above the bond market, in which the very front end of the curve is anticipating a delayed payment – hopefully, for once, the bond market is wrong.

Great expectations. Yesterday, the New York Fed released its Survey of Consumer Expectations. You probably were not standing outside the Bank’s downtown NYC location to receive it. Even if you wanted to, you might struggle to find the non-distinct building which houses some 30% of the world’s gold reserves, the largest depository of foreign gold reserves in the world. New York, go figure. Anyway, let’s say you were not standing outside waiting for the release, but still you are wondering why I have already spilled so much ink on the release. Why? Because in it, the Fed talks about… well, consumer expectations, as the report’s title implies. One of the report’s areas of focus is on inflation.

Consumer’s inflation expectations are important for one very practical reason. Pay attention now. If consumers begin to expect inflation, they are, in a sense, accepting inflation. Companies, therefore, are happy to meet consumers’ expectations and raise prices. In theory, there are three types of inflation. 1. Demand-Pull Inflation, 2. Cost-Push Inflation, and 3. Built-in Inflation. The first one is the one that gets most attention and is driven by strong consumer demand for goods. This is the one on which the Fed’s monetary tightening should, in theory, have the most effect. The third one deals with expectation on behalf of both consumers and suppliers. Expecting higher prices leaves consumers more willing to pay them. This also causes consumers to demand higher wages. Suppliers, who must pay higher wages to keep positions filled, will raise prices to consumers to maintain margins. Kind of like a self-fulfilling cycle.

So, of course, we would like to know what consumers are thinking about the labor market, the economy, and about general household financial conditions, but what we really should want to know about is what consumers are expecting regarding inflation, especially in this current market regime in which inflation is the key driver of policy and the markets. So, with that build up, what are consumers thinking about inflation? Well, according to yesterday’s report, consumers are expecting inflation to be +4.4% in a year from now. That is still a long way from the longer-term +2.0% that the Fed has as its target. However, there is some good news. In the prior report consumers were expecting a higher +4.7% in last month’s report, so expectations have eased by -0.3%. Additionally, respondents were expecting inflation to be +2.9% in 3 years from now. I wouldn’t put much import on the actual number, but the assumption that inflation will be going down beyond next year is somewhat positive. If you don’t think the Fed is paying attention to this… well, all you have to do is remember that it was the Fed itself that conducted the survey

A few additional data points from yesterday’s report. Consumers expectations of home price increases went up from the last survey. Good news if you are selling, and no-so-good if you are hoping to buy. Consumers are expecting the unemployment rate to be higher in a year, and the number of respondents who believe so is increasing. That should not come as a surprise given that the US unemployment rate is still near a multi-decade low while the Fed is unabashedly attempting to get people laid off. Additionally, respondents’ expectations about the growth of household spending decreased by -0.50% to +5.2%, and that should help on that Demand-Pull Inflation that I mentioned above. Finally, and perhaps, most importantly to most of us, consumers are increasingly expecting stock prices to be higher in a year from now, though the exact number, 35.8% is not exactly encouraging. If you are an optimist, a month over month increase should be reassuring, if you are not… well, remember that these are just expectations.

WHAT’S SHAKIN’ THIS MORNIN’ ☀

Skyworks Solutions Inc (SWKS) shares are lower by -9.26% in the premarket after the company announced that it missed EPS estimates last quarter. The company lowered its current quarter EPS and Revenue guidance to below average analysts’ estimates blaming headwinds in the Android infrastructure. Dividend yield: 2.35%. Potential average analyst target upside: +15.6%.

DaVita Inc (DVA) shares are higher by +6.49% in the premarket after it announced that it beat EPS and Revenue targets by +40.3% and +1.50% respectively. The company raised its current quarter EPS and Sales guidance above analyst expectations, citing improving macro conditions. Potential average analyst target upside: +9.2%.

YESTERDAY’S MARKETS

Stocks had a mixed close yesterday as traders awaited key inflation data due out tomorrow morning. The S&P500 slipped by -0.05%, the Dow Jones Industrial Average declined by -0.17%, the Nasdaq Composite Index gained +0.18%, and the Russell 2000 Index pulled back by -0.31%. Bonds traded lower and 10-year Treasury Note yields climbed by +7 basis points to 3.50%. Cryptos dropped by -8.32% and Bitcoin declined by -4.80%.

NEXT UP

• Fed speakers today: Jefferson and Williams.
• The Treasury will sell $40 billion 3-year notes.
• After the closing bell earnings: iRobot, Electronic Arts, Occidental Petroleum, Luminar, Twilio, Duolingo, Lincoln National, BuzzFeed, Rivian, Bloom Energy, Airbnb, and Wynn Resorts.