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When American Consumers Are Depressed, They Go Shopping!
Consumer spending may seem to be defying economic gravity—remaining robust in the face of depressed consumer confidence, affordability concerns, and elevated interest rates. Indeed, the saving rate is dropping toward zero and could even turn negative by the end of the decade. Today, Ed and Elias explain why that’s no worry; why consumer spending has been so resilient, like the economy itself this decade; and why they expect the resilience of both to continue. … Also: Inflationary expectations are on the rise. That raises the risk that so are secondary inflationary effects from this year’s inflationary shocks. And that raises the probability that the Fed’s September rate hike won’t be the last this year. … And: Dr Ed reviews “Lioness” (+).
GLOBAL MARKETS CALL: French Toast & Brazilian Bossa Nova
I. Bonds The global bond market remains jittery, though yields may be starting to stabilize after their rout in recent months (chart). Nevertheless, geopolitical turbulence may still buffet them. Yields have risen for an assortment of reasons, from better-than-expected economic growth (US) to fiscal instability concerns (France). Brazil and China are the only major countries showing declines in bond yields so far this year (chart). Bond yields have also risen on higher-for-longer oil prices as the war in the Middle East has continued to disrupt oil supplies. The Houthis have said airliners should avoid Saudi airspace, declaring it a zone of military operations after the Saudi-backed Yemeni government launched an offensive against the group earlier this month. On Saturday, a third attack this week on Riyadh's international airport left 12 people dead and dozens wounded. President Donald Trump said the US will "look at" joining Saudi strikes on Houthis. II. Stay Home vs Go Global So far this year, the US has held onto its 65% market-cap share of the All Country World (ACW) MSCI (chart). Japan's share has also held steady at 5%. However, Europe's share has slipped (13.3%) to the advantage of the share of the Emerging Markets (12.0%). Nevertheless, last week, the US outperformed the Developed World ex-US as the French debt crisis weighed on European stock prices (chart). So far this month, the US MSCI is the second-best-performing stock price index we track (chart). Brazil was the best-performing in response to first-round presidential election results showing conservative Flavio Bolsonaro, son of former President Jair Bolsonaro, exceeding expectations in the race against leftist President Luiz Inacio Lula da Silva. III. Earnings & Valuation The ratio of forward earnings for the US MSCI to the ACW ex US MSCI fell through the summer this year (chart). It stopped doing so in recent weeks. Forward P/Es have been falling worldwide since the start of the year, as forward earnings have outpaced stock price gains (chart). IV. Currencies The French debt crisis is also weighing on the euro, which is down from $1.20 at the start of this year to $1.12 (chart). As a result, the DXY dollar index has rebounded to its best reading since early 2025 (chart). We remain constructive on the US dollar. V. Notable (1) German factory orders fell sharply in August, plunging 10.6% m/m (chart). The primary driver behind the contraction was a steep pullback in large-scale contracts. The headline drop was almost entirely due to a 61.5% slump in large-scale orders for aircraft, ships, trains, and military vehicles, which suffered a major correction following an exceptional surge in July. When these volatile large-scale contracts are excluded, new manufacturing orders actually slipped by just 0.1%, indicating that core industrial demand was essentially treading water rather than experiencing a broad-based collapse. (2) CQQQ continues to underperform QQQ (chart). While China's long-term industrial policy goals are ambitious, cyclical demand inside China has struggled to generate the same explosive revenue growth seen in Western tech sectors. Furthermore, China's tech industries carry a persistent regulatory discount. Chinese technology sectors have historically been vulnerable to abrupt policy shifts, anti-monopoly crackdowns, data security reviews, and ongoing geopolitical tensions (including US–China trade restrictions and semiconductor export controls), which compress valuations and deter long-term institutional capital inflows.
US MARKETS CALL: Is The 10-Year Bond Yield Back To The Old Normal?
I. Bonds The Economist just rang the all-clear siren for the bond market (chart). It is safe to buy bonds now that the front cover of the October 10 magazine is titled "Will bonds blow up?" This and other national magazines’ cover stories often have been great contrary indicators. It’s the “front-page curse” (once magazines put in the time it takes them to produce a cover article on a financial market trend, investors have moved on). We think the 10-year Treasury bond yield is back to normal this year, i.e., in the 4.00% to 5.00% range (chart). We've disputed the widespread notion that "interest rates are likely to remain higher for longer." That implies that they should come back down at some point. We've argued that "interest rates are likely to stay normal for longer." They were abnormally low between the Great Financial Crisis and the Great Virus Crisis, when central banks rigged the fixed-income markets with zero and near-zero interest-rate policies and quantitative easing. As bond yields rose in recent months to the top end of what we consider the normal range, we expected buyers to be attracted by higher yields, so we expected the range to be maintained (that’s what happened in in 2023, when the yield spiked to 5.00% in late October). This time, the yield spiked above the normal range, to around 5.25% (as it did during the 4.00%-5.00% normal-range period from 2002-07). In recent conversations with several of our institutional accounts, many expressed interest in buying bonds at levels above 5.00%. A slice-and-dice analysis of the 10-year yield shows that its rise this year has been almost entirely attributable to the rise in the comparable TIPS yield (chart). The spread, which is a proxy for inflation expectations over the next 10 years, has been range-bound roughly between 2.00% and 2.50% since 2023. Since 2023, the TIPS yield has closely tracked the Weekly Economic Index, which tracks the growth rate in real GDP on a y/y basis (chart). This supports our view that the increase in US nominal yields has been driven by better-than-expected economic growth. In the past, the expected inflation spread was highly correlated with the price of a barrel of crude oil (chart). That correlation has been weaker since 2023. Bond investors seem to believe that inflation will remain low in the 2.00%-2.50% y/y range over the rest of the Roaring 2020s into the Roaring 2030s. We agree. Nevertheless, we can't rule out the possibility that another spike in oil prices, driven by a re-escalation of the war in the Middle East, won't push nominal bond yields higher. If so, that will likely be another buying opportunity. By the way, the expected inflation spread closely tracks the 10-year forward inflation-linked swap (chart). All major forward inflation-linked swaps are roughly in the 2.00%- 2.50% range (chart). Meanwhile, the link between the 13-week change in the 10-year nominal yield and the Citigroup Economic Surprise Index suggests that the former's recent climb should abate (chart). II. Stocks The steep rise in bond yields since mid-August has weighed on the S&P 500 equal-weight stock price index, while the market-weight index rose to record highs last week (chart). The former may be finding support at its 200-day moving average. The gap between XMAGS's outperformance and MAGS's underperformance has narrowed since mid-August as bond yields jumped (chart). Over the past couple of weeks, they both did well. The Russell 2000 also dipped as bond yields soared since the late summer (chart). The index is back at its 200-day moving average, which should hold if US bond yields continue to stabilize. III. Sentiment Investor sentiment turned more bullish last week according to the two bull-bear ratios we track. (chart). Like the front-page curse, they also tend to be contrary indicators. However, they aren't bullish enough to be bearish for stocks.
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S&P 500 CONSUMER STAPLES SECTOR & INDUSTRIES: ANNUAL EARNING GROWTH FORECAST
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