For all the worries about tariffs causing pain for consumers, shoppers have so far been mostly shielded from—or shrugged off—higher prices. Businesses have absorbed much of the cost from the new levies as they took effect last month, thus suggesting profit margins are shrinking.
This week Target and Home Depot are to report quarterly earnings. Will they make similar statements as Wal-Mart…higher prices are coming as it works through its inventory and begins to pass on the costs of newer merchandise?
Manufacturers have also signaled they are paying higher prices, but they too are not passing on increased costs.
As noted most believe next month the inflation data will deteriorate and the last three months of very benign readings are the proverbial calm before the storm.
Friday’s readings of the University of Michigan sentiment index declined to the second lowest level on record as inflationary expectations climbed to a multi decade high.
Most economists and executives have said it is not sustainable for businesses to keep absorbing costs, however this group says it is still too early to gauge which items will increase more and by how much and how long.
The decision as to when to pass on costs and by how much is perhaps complicated for all companies fearing a loss of market share, perhaps believing any tariff-related bump may be a one-time event.
The markets have decided tariffs may be a relative nonevent. Equities have staged a dramatic rally from recent lows, the sixth most powerful advance since 1950 according to Bloomberg.
Treasuries have been equally volatile. In about 10 trading days market expectations of monetary easings has gone from 4 rate cuts to two rates cuts and now back to almost three.
A primary determinant of long-term Treasury yields are inflationary expectations. According to the a fore-mentioned Michigan sentiment survey, consumers expect prices to rise at annual rate of 7.3% over the next year and the highest since 1981. Over the next 5 to 10 years, consumers are expecting a 4.6% pace, the highest since 1991.
Are inflationary expectations becoming unanchored? Will these expectations be evident in longer duration Treasury bonds, yields that to date have not reflected current [or expected] inflation.
Speaking of which, Dow Jones reported that last week over a span of four days the Federal Reserve stealthily purchased $43.6 billion in long dated 30-year bonds. $8.8 billion was purchased alone on May 8 and another $34.8 billion earlier in the week.
On May 8, the US Treasury auctioned $25 billion of Treasuries. Are we back in Quantitative Easing (QE) or is this an example of yield suppression, a topic of last week’s Congressional Testimony of Treasury Secretary Bessent.
It is often written that the most obvious conclusions are ignored. Can it be remotely suggested that such is occurring today or is something entirely unexpected or not forecasted unfolding?
What will happen this week?
The economic calendar is relatively sparse comprised of the Index of Leading Economic Indicators, several manufacturing surveys and housing statistics.
Last night the foreign markets were down. London was down 0.56%, Paris down 0.73% and Frankfurt down 0.14%. China was up 0.12%, Japan was down 0.68% and Hang Seng down 0.05%.
Dow and NASDAQ futures are off 0.50% and 2.0% respectively as Moody’s downgrades the US Treasury. The rating agency was the only agency that did not downgrade the UST in 2013. Today, however, Moody’s stated that the country’s ballooning debt and fiscal outlook cannot be ignored and policies must be implemented now to end the out-of-control spending.
Some have downplayed the action while others see as adding to concerns that there could be an increase in the loss of confidence in the US economy and its policies. The dollar also declined on the downgrade.
The 10-year is off 19/32 to yield 4.55%.
