Crash in Consumer Confidence and Soaring Stock Market
Welcome to Friday! You know, Fridays are typically for looking back at the week that was, so here’s your weekly wrap. I thought it might be helpful to jot this down for the new subscribers who might not be in the loop yet.
This week, a 30-year government bond auction reached its highest yield in 25 years, while the stock market set new records. Retail sales figures weren’t great, but surprisingly, they were somewhat better than anticipated. Consumer sentiment has dipped, mostly because Republicans are feeling less upbeat about the economy. Despite some worries, inflation remained weak for the second consecutive month, leaving critics of Federal Reserve Chairman Kevin Warsh somewhat embarrassed.
Alright, let’s dive in!
Republican Consumer Sentiment Takes a Hit
The University of Michigan Consumer Confidence Index showed an 8% decline in the early weeks of August.
Although opinions on personal finances saw only a minor drop, expected business confidence plummeted by 11% in the short term and 17% in the long term. This decline was evident across the political landscape, with Republicans experiencing the most significant drop this month. Their sentiment is now, astonishingly, 19% lower than it was before the Iran conflict, marking the lowest level since the 2024 election, as noted by research director Joan Hsu.
These numbers really highlight how Republicans are leading the downturn. Democratic sentiment dipped by 3.7 points, and independents only saw a change of 0.8 points. In contrast, Republicans experienced a sharp fall of 9.5 points. Their current status index dropped by 6.1%, while the expectations index fell by 11.8 points.
We discussed this previously. It seems the economist YouGov poll revealed how MAGA is feeling the pressure of the ongoing war with Iran and rising fuel costs. Even those who supported the initial actions might not have anticipated this prolonged engagement. Time and again, we were told that the conflict would resolve soon, yet the fighting continued, and the Strait of Hormuz remains partially blocked.
The looming midterm elections are likely adding to the uncertainty, as Republicans still seem to lack a clear message going forward. If they manage to retain control of the House and Senate, what then? Honestly, it’s anyone’s guess. Surveys indicate widespread anxiety that soaring gas prices might exacerbate inflation. Looking ahead, Republicans are aware that former President Trump’s economic policies may face considerable challenges, particularly if the Democrats secure a larger majority. It’s no wonder hopes are so low.
Consumers Turning to Shopping as a Coping Mechanism
There’s this concept called shopping therapy, you know, where people buy things to lift their spirits when feeling stressed or down. If the consumer sentiment stats are to be trusted—and that’s a question mark—they might help explain why people continue to spend despite their bleak economic outlook.
Take a look at the retail sales data from July. A reported 0.6% decline might seem aligned with the negative sentiment, but looking deeper, things don’t add up. Spending in discretionary areas like food services and restaurants actually increased by 0.5%. The general merchandise category, which encompasses everything from furniture to department stores to health and personal care, also saw an uptick. In fact, clothing stores saw a 1.9% rise in July alone.
Sure, spending at gas stations went down, but that’s just because prices were lower in July compared to June. The decline in online spending? Well, that might be attributed to Amazon moving Prime Day to June instead of its usual July spot. Although sales for home electronics dipped, they were still lower than prices for many mainstay products. Car dealerships, on the other hand, appear to be the only area truly faltering.
Besides shopping as a means of therapy, there may be other factors at play here as well. One possibility is that University of Michigan research might not accurately reflect consumer behavior anymore. I don’t mean to suggest the survey is outright wrong, but they could be oversampling Democrats. Negative economic conditions don’t necessarily lead to a downturn in actual economic activity, which poses a problem. The original goal of measuring consumer sentiment was to predict behavior, and without that connection, such readings become mere speculation.
Stocks Soar While 30-Year Bond Yield Hits a 25-Year High
The S&P 500 wrapped up on Thursday at a record high. Meanwhile, a 30-year government bond auction closed with its highest yield in 25 years. These two trends aren’t completely at odds; as stocks gain, bond prices typically fall, pushing yields higher, and vice versa. This is generally seen as a positive economic sign, indicating that investors are willing to take on more risk and seeking higher returns.
So, why do so many analysts view the 30-year bond auction as a potential warning sign? Well, part of this could be what some call Trump Derangement Syndrome. Actions during Trump’s presidency are often viewed through the lens of existential threat to democracy or other larger issues. Some argue that the federal deficit and government debt are so substantial now that securing financing could become problematic.
As for the 30-year bond yield now hovering around 5.26%, it doesn’t signify a distressing situation. It has surpassed this level as recently as 2007. From 2001 to 2006, the U.S. even halted 30-year bond issuances. Nevertheless, yields during that time remained above current levels. Historically, these yields appear even less noteworthy, as they hit 8.16% in 1994 and almost 14% back in 1984.
The auction results themselves didn’t suggest a withdrawal from Treasury purchases. The final yield was slightly higher than anticipated, with a tiny tail of 0.4 basis points. The bidding ratio was close to recent averages, indicating a stable auction rather than a concerning one.
Moreover, since the end of 2024, nominal 30-year bond yields have climbed by approximately 0.5 percentage points, while inflation-adjusted yields for 30-year TIPS have slightly risen too. In contrast, the ten-year breakeven inflation rate has actually dropped from 2.34% to around 2.24%. It seems inflation worries might be overheating; instead, investors are pursuing better real returns as the economy demands more capital, largely driven by advancements in artificial intelligence.
If increasing yields were genuinely indicative of an economic downturn, we wouldn’t be seeing stocks reach new highs. The best approach to understanding the 30-year bond yield right now is actually bullish.
Inflation Challenges Criticism of Kevin Warsh
This week, those who have been critical of Federal Reserve Chairman Kevin Warsh found themselves on shaky ground. They expressed frustration over Warsh’s new communication strategy and lamented that his critics were justified in advocating for rate hikes during the last meeting. It was somewhat fortuitous for the Consumer Price Index to rise just 1% in July, especially since it didn’t provide forward guidance, remained neutral to the Fed’s forecasts, and—along with the majority of the Federal Open Market Committee—chose to keep rates steady. Underlying inflation is definitely easing. The clamor for higher interest rates comes off as largely tied to a version of Trump Derangement Syndrome—an inclination to oppose whatever policies Trump supports.
Happy Anniversary to the Floating Dollar
On the evening of August 15, 1971, then-President Richard Nixon cut the last ties between the dollar and gold.
Under the Bretton Woods system, foreign nations could exchange dollars for American gold at a set rate. However, the U.S. was issuing more dollars than it could back. Inflation surged, trade balances worsened, and foreign governments began demanding gold in exchange. Britain, for example, had just requested a large cash exchange.
At Camp David, Nixon consulted with Treasury Secretary John Connally, Arthur Burns, the Chairman of the Federal Reserve, and Paul Volcker, a senior Treasury associate. They advised Nixon that he needed to halt the gold standard.
The decision to close the gold window was supposed to be temporary. However, this effectively dismantled Bretton Woods. Efforts to restore the system failed, and by 1973, major world currencies transitioned to a floating model. We have since entered into a financial era where the dollar is backed solely by U.S. credit, with no promise of conversion to gold or anything else.
