The Great Inflation Hype Running Low On Buyers

This morning we learned that US retail spending fell 1.3% in May (more than the -.80 expected). After a year of record spending on durable goods–items that typically last at least three years, like appliances, tools, computers, electronics, jewelry, vehicles, furnishings, and equipment–consumer demand drives some 2/3rds of GDP growth, looks to be coming off the boil.

Some of this is that higher prices and delayed delivery times are damping appetite; some are because there are only so many goods a consumer can add, upgrade, and replace before losing interest and/or spending ability. And because durable goods have multi-year utility, the recent demand frenzy has necessarily pulled forward spending from the next few years. Consumers are now more likely to focus discretionary funds on some newly reopened services and debt-repayment (also considered saving).

Signs of this are evident in recent surveys that show a plunge in consumer plans to buy vehicles, appliances, and housing over the next six months.

Commodities have been sensing the shift, with the price of many key inputs like lumber (-42%), steel rebar (-18%), and copper (-9%) down sharply from recent peaks. As West Texas Crude has climbed back to the $70 area, ICE motorists are now paying about 37% more to fill up today than six months ago. Increases in oil, gas, and food are officially removed from consumer price index (CPI) reports, but higher prices tend to prompt a general pullback in discretionary consumer spending; this also likely explains some spending retrenchment now.

Asset market participants are not positioned for a decline in consumption and inflation–quite the opposite. There are few left betting on lower prices, with shorts at record lows and the put/call ratio at the lowest level since July 2000.

At the end of May, a confident consensus had commodities and equities (shown below, starting from far left) wildly overbought (2.5 to 1 standard deviation above 20-year trends), while bonds and the US dollar (on the far right) are historically oversold.

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