This week’s extremely strong performance comes after a better-than-expected inflation print coming last Thursday that sent the S&P 500 over 5% higher. That print showed us that inflation over the last 12 months was 7.7%, high but not as much as the 8% the market expected, and well below the 8.2% in September. What caused the bout of buying in markets was the fact that the chance of a soft landing and no recession has increased. The Fed may not have to go as high with interest rates to calm inflation. In my article, Jerome Powell Might’ve Lied… But in a Good Way, I dive deeper into this topic.
The University of Michigan Survey of Consumers showed that consumer sentiment fell 8.7% over the month of October and two of the main reasons for this were the effect of higher prices and higher interest rates.
The Data: Broad consumer sentiment fell 8.7%, but something particularly interesting was consumer views on durable goods - goods like cars, appliances, and furniture - fell 21% over the month.
Along with those readings, the current economic conditions index fell 11.9% and the index of consumer expectations fell 6.2%.
Total debt jumped by $351 billion from July to September, the largest quarterly increase since 2007, bringing the collective household debt in the U.S. to a fresh record $16.5 trillion. That’s an increase of 2.2% from the previous quarter and 8.3% from a year ago. The biggest contributors to that debt load came from mortgage balances, which rose $1 trillion from a year ago to $11.7 trillion, and credit card debt, which climbed to $930 billion. Credit card balances collectively rose more than 15% from a year ago.
What it Means: People aren’t slowing down their spending, but they know things are bad. On top of mind for most consumers are higher interest rates, higher prices, and a pending recession.
But if milk is more expensive it is not like you can’t buy it, so what do you do? You get upset and you put it on your credit card.
If houses are more expensive and debt is more expensive, but you need a house, you pay more and you get upset about it. That is just what happens.
On the recession, it is actually good that we are seeing debt balances increase, because that means people are still spending money. Spending is what drives our economy.
People maybe know that a recession is going to happen but they feel like they can still take on some debt to pay for what they want currently. That increases the chance of the Fed bringing inflation down before a recession does.
Our current rate of debt though is not sustainable and that is what this survey reflects. People know that they can’t just keep taking on debt and buying things. That is why the outlook that consumers see is bad, their current sentiment is bad, and why their view of durable goods is so bad. Why would you want to buy something today with debt, especially a big thing, if you think something bad is going to happen in the future?
This is the limbo the economy is in right now with businesses and consumers.
With the election results close to a close it appears as though we will have a divided government. There has been a lot of buzz on the debt ceiling and how issues with whether or not Congress can get to an agreement on raising the debt ceiling, increasing the chance of a US default on its debt, and the removal of US Treasuries being no longer a “risk-free” asset.
Treasury Secretary Janet Yellen warned that lawmakers' failure to raise the statutory limit on U.S. debt posed a "huge threat" to America's credit rating and functioning of U.S. financial markets.
Some politicians have threatened to use the next hike in the $31.4 trillion debt ceiling as leverage to force concessions from U.S. President Joe Biden. U.S. public debt stood at $31.2 trillion on Wednesday and without an increase, analysts anticipate a potential default crisis by the third quarter of 2023.
Now I will say I don’t have any doubt that it will be raised but there will be some strong tension as policymakers can and will use a default crisis as leverage to get what they want, but getting blamed for a US debt crisis would be far worse. Whether it gets raised on the last possible day or months before, the market will start pricing in the chance of a crisis before it happens and revert when something does happen.
If you are curious I would implore you to what the 10-year Treasury yield going into these talks. If it rises in the talks, that means the chances of a debt crisis are rising. If they are falling that means the chances are falling.
Poland, a NATO member, said on Wednesday that a Russian-made missile fell in the country killing at least two people. President Joe Biden said it was “unlikely” it was fired from Russia.
The launch and subsequent blast, which Ukrainian President Volodymyr Zelenskyy called “a very significant escalation,” prompted Biden to call an emergency meeting of G-7 and NATO leaders. A deliberate, hostile attack on a NATO member could trigger a collective military response by the alliance.
The Reality: Russia likely isn’t ready to involve the countries of NATO in a full escalation of war. Three U.S. officials said the missile was fired by Ukrainian forces at an incoming Russian one amid the crushing salvo against Ukraine’s electrical infrastructure Tuesday.
Disney’s “Black Panther: Wakanda Forever” debuted with a $330 million global box office launch. The film demolished the record for a November opening in North America, soaring past the previous record of $158 million set by “The Hunger Games: Catching Fire.”
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