Tuesday, May 14, 2024

inflation expectations, US influence, ETF momentum, lessons from GameStop

“Almost always, the creative dedicated minority has made the world better.” – Martin Luther King, Jr. ||

Hello, everyone! I hope you’re all doing well.

Programming note: this newsletter will not be publishing on Wednesday, as it’s a holiday where I live – the holiday of the patron saint of Madrid, and it’s a big deal involving street parties and local fairs and lots of drinking and dancing.

In yesterday’s newsletter, I gave some background on San Isidro, if you’re curious - a very typically Spanish saint, always happy to deliver a chuckle.

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IN THIS NEWSLETTER:

• Expectations count

• A shift in US power

• The ETF story is not over

• What GameStop teaches us

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WHAT I’M WATCHING:

Expectations count

Yesterday, I gave a brief intro to what we can expect from tomorrow’s key US inflation read. Today, I want to look at how expectations are moving.

Last Friday, we got the latest consumer survey results from the University of Michigan, which showed an uptick in inflation expectations for both one year and five years out – this is not a good sign. True, expectations tend to react to headlines, but they also influence behaviour, and moving up is heading in entirely the wrong direction as far as the Federal Reserve is concerned.

According to the survey, consumer expectations of inflation one year from now jumped from 3.2% in the last read, which coincided with consensus expectations, to 3.5%, the highest level since early December. Expectations for inflation 12 months out now coincide with the actual headline CPI increase for March. In other words, consumers seem to think the drop in inflation is done.

(chart via Investing.com)

Perhaps even more worrying, inflation expectations five years out also ticked up, to 3.1%. This loudly suggests that the “public” doesn’t expect the Fed to reach its inflation target in a sustainable manner within the next five years. That’s a long time in markets.

But wait, this is just the median figure (the mid-point). What about the mean (the average)? Well, that looks quite a lot worse – it is now well over 5% and heading up fast. If that is the average read, you have to wonder what the outliers are.

(chart via Bloomberg)

And even more worrying, ‘cos why not, is the sharp slump in consumer sentiment. The consensus forecast was for an index measure of 76, itself a slight decline from the last read of 77.2 – the value for May came in at 67.4. Consumer expectations was forecast to read 75 (vs 76 in April), but came in at 66.5. Consumers are feeling a lot less optimistic but expect inflation to remain sticky, which reinforces the risk of stagnation.

(chart via Bloomberg)

Going back to inflation expectations: yesterday, we got the latest read from the New York Fed, which showed consumer expectations for April of 3.3% inflation one year out, up from 3% in March the highest level in five months. The five-year inflation outlook increased from 2.6% to 2.8%. Expected wage growth, however, fell slightly. Not good.