Rates: Upbeat Consumers vs. Downbeat Fed?

Mid Week Bond Update

Rates: Upbeat Consumers vs. Downbeat Fed?

Could a rise in consumer sentiment influence the Fed's plans?


The general consensus that the Fed would make three hikes in its target rates in 2019 appears to be all but completely vanished – with a few observers even suggesting that the next move by the Fed could even be a rate cut to help support a potentially flagging economy.

One factor that could tilt the balance is consumer sentiment. If confidence in the economy bounces back from the pullback seen in Q4 2018, the optimistic growth forecasts embedded in the latest U.S. budget proposal become more likely. That would allow rates to resume the upward path abandoned at the end of 2018 – a critical issue for bondholders worldwide.

One key influence on U.S. consumers could be the path of credit card interest rates. Those rates are near 20-year highs, as shown in Brandywine Global’s chart below.   What's more, the Fed's possible no-hike year, spoken about by a number of economists after the publication of the Fed's "dot-plot" median forecasts made in December, could very well reduce the rates consumers pay on account balances.

Add all that to the recently-announced inflation-adjusted rise in wages of 1.9% for February vs. the year-ago month – and the outlook for consumer behavior could end up more positive than many believe.


Credit Card Interest Rates: 20-Year Peak

Chart courtesy of Brandywine Global. Sources: Bloomberg, Haver Analytics, 1/31/19. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

On the rise:  U.S. Small Business Optimism

February saw the National Federation of Independent Businesses (NFIB) "optimism index" rise to 101.7, up from its two-year low of 101.2. That's a turned corner rather than a full-fledged turnaround; the index peaked half a year ago, hitting 108.8 on August 31, 2018.  

The report cited the partial federal government shutdown for the falling figures toward the end of last year, noting: "Now that the government is funded, owners should be getting back to business with the rebound in consumer sentiment."

That said, the only two subcomponents of the overall index to decline were plans to hire and earnings trends – suggesting that sentiment among NFIB members had yet to solidify.
 

On the slide: Turkey in Recession – First time in a Decade

Turkey's Statistical Institute reported that Q4 economic growth fell -2.4%, extending the dismal spirit of the previous quarter (Q3), which was down -1.6% below Q2.  That met the most commonly accepted definition of a recession:  two consecutive quarters of economic contraction. Year over year, growth fell a full -3% in Q3. The last time Turkey faced recession was for the full year 2018, while the rest of the world was facing challenges also.

Though disappointing, the fall was not a surprise. The total face value of loans in the economy dropped over 11% since this past summer, when the country's currency crisis and conflict with the U.S. over trade and policy toward Syria erupted. The Turkish lira has declined about 3% vs the U.S. dollar since the end of 20181 and some 30% over the past 12 months – of the major EM currencies, only the Argentine peso has done worse. Turkey's U.S. dollar 5-year bonds now yield 6.297%; only Ukraine, Argentina and Venezuela, at 8.9%, 9.9% and 35.7% respectively, are higher.

It's worth noting that President Recep Tayyip Erdogan has mostly stopped criticizing the central bank since the end of the currency crisis. But the pressure to cut rates could resume now that growth has gone negative.

 

Source: Bloomberg, March 12 2018

All data Source: Bloomberg as of March 7, 2018 unless otherwise specified.

 

Definitions:

The Federal Open Market Committee (FOMC) is the policymaking body of the Federal Reserve System (Fed) and is responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The federal funds rate (fed funds rate, fed funds target rate or intended federal funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.

The NFIB Small Business Optimism Index is produced by the National Federation of Independent Business from data compiled in its monthly survey on small business owners that belong to the NFIB.

The National Federation of Independent Business (NFIB) is a US small business advocacy association, representing 350,000 small and independent business owners.

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