The market continues to see-saw as investors try to decide whether the economy is healing and whether the Fed is going to moderate future rate hikes as outlined in Powell’s recent speech (see this short post). As for us, we have been consistently surprised by the resiliency of the consumer which has yet to succumb to an ongoing & massive inflationary spike. Yum!’s management rightly points out that low-income consumers probably aren’t pulling back as much as expected given that the bottom 25% of salaries are up +10% vs. pre-covid levels (reflecting entry-level wages increasing from $8/hr. to $15). Notably, Yum! further provides good insight into how the use of tech can help keep restaurant industry players in the game by lowering labor costs (an unfortunate mandate given the nearly doubling of low-end wage rates).
In any case, it is this very wage hike that has the Fed so upset and the thought is that inflation would subside with less disposable income out there to chase too few goods & services. Of course, less spending would wreck corporate America which depends on a sufficient level of disposable income to keep from layoffs and other cost cutting initiatives. In the meantime, we are all trying to assess the long-term impact of the Fed’s rapid interest rate hikes which were implemented to offset the unintended consequences of the covid lockdowns that we now face. While mortgage rates are moderating some, nobody really knows what the prospects are for the very important real estate market. According to Lowes, although home prices are decreasing due to rising interest rates, 90% of consumers are locked into low-interest rate mortgages or own their homes. So despite Lowe’s price hikes to keep up with its high single-digit input inflation, its customers exhibited resiliency and traded up in multiple categories during the quarter. Once again, the consumer keeps surprising us.
In conclusion, we are stuck in a waiting period as it is too soon to tell how much gas the consumer has left in the tank, how much downsizing is left for corporate America (hopefully none), and what lagging effects will come from very aggressive rate hikes in a supply-constrained economy. Who knows? Maybe there are some upside surprises for us as well that good old St. Nick may be able to pull out of the bag.
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