Will the Consumer Continue to Hold the Line?

  • Tough and effective Ukrainian resistance to the mortal threat of the Russian invasion has surprised the world. In a similar fashion, but certainly less consequential, the US consumer has withstood the impact of the pandemic and higher prices to continue to drive the economy forward. The question now, however, is will that resilience continue?


  • Fading confidence readings have so far only been just that. The consumer, while professing to be worried, has not really stepped  back their spending, and that has kept the economy on its current growth profile. That has also allowed the Fed to sound an increasingly hawkish tone. A tone that the market continues to price via higher Treasury yields.


  • This week we’ll get a combination of readings that may begin to unravel the question of the consumer. First, another confidence reading will come tomorrow via the Conference Board’s latest consumer confidence reading. It’s expected to drop from 110.5 to 107.0. If realized, that would be the lowest confidence reading in a year. No real surprise there. The combination of ever-increasing prices and heart-wrenching geo-political events have conspired to cast doubt in even the most optimistic of persons.


  • The second event will come on Thursday with the Personal Income and Spending Report for February. Sure, it will paint another ugly inflation picture with Core PCE expected to increase to 5.5% YoY vs. 5.2% in January. But the personal spending number, inflation-adjusted, is expected to dip to 0.5% MoM vs. 2.1% prior. While the monthly number can jump around, a miss to the downside could be an early signal that flagging confidence, and rising prices, are beginning to impact consumer spending patterns. If that plays out, the Fed’s ability to engineer numerous rate hikes this year could be in peril. Current market expectations have eight 25bps rate hikes priced in for 2022, with fed funds reaching 2.5% by year-end.


  • That is one very big reason we’re seeing an increasingly flattened yield curve. The short-end continues to price in a very hawkish Fed, bent on curbing inflation, while longer-end investors see an economy that may not be able to weather all those planned rate hikes.


  • The consumer, constituting nearly two-thirds of the economy, holds the cards. Will they continue to spend like the proverbial drunken sailor on shore leave, or will they finally relent to higher prices and an increasingly troubled world view and pull back? Perhaps this week will offer some clues to those questions.


US Treasury Yield Curve: 12/31/21 and 3/28/22


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 2.42 2.64 2.70 2.81 2.95 3.41
0.50 2.40 2.61 2.64 2.69 2.80 3.30
1.00 2.40 2.58 2.60 2.65 2.71 3.17
2.00 2.57 2.55 2.57 2.60 NA
3.00 2.53 2.53 NA
4.00 2.49 NA
5.00 2.45 NA
10.00 NA

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Published: 03/29/22 Author: Thomas R. Fitzgerald