Monday Musings: May 31, 2022

May 31, 2022


Public Trust Credit Team

Consumers take out their crystal balls as confidence wanes in the U.S. economy

Despite a tight labor market and rising wages, U.S. consumers are becoming increasingly pessimistic on the U.S. economy based on the two major measures of consumer sentiment. The Conference Board survey released last week shows that sentiment has hit a three-month low and the University of Michigan Consumer Sentiment Survey shows that sentiment is near a decade low based on their measurements. It is rare for sentiment to be on such a downward trend when the economy is hot and it’s likely that sentiment is reflecting future expectations more than current conditions. Inflation remains high and it is unlikely to see a material decrease this year, home prices rose at another record pace in March, and wage gains have begun to show signs of slowing which all are leading consumers to take a dimmer view.

Consumer confidence is important considering the service and consumer economy is about 70% of economic output and earnings from the retailers last month showed us that consumers are beginning to slow spending. It is also worth noting that while spending has increased the actual amount of goods purchased has decreased which indicates that inflation may be propping up dollar-measured spending indicators. At the moment, we see the declines in consumer confidence as a manageable risk to the markets, but decreases in sentiment tend to lead to decreases in spending which could accelerate a decline in the U.S. economic growth.

Fixed-income currently appears more attractive to investors in response to concerns of slowing economic growth

Bond markets rallied in May as investors recognized the value of fixed-income assets. Global bond markets have been pressured in recent months from increasing inflationary pressures and the uncertainty surrounding monetary policy tightening of major central banks. Despite the expectation of prolonged inflationary pressures, concerns of slowing economic growth appear to have overtaken recent market thinking. As a result, global corporate debt advanced in May and Treasuries are on their way to what could be their best month since November. The recent surge in the fixed-income market is likely due in part to the expectation that future central-bank interest rate hikes are now largely priced in coupled with to general increases in bond yields which make the asset class more attractive.

The renewed focus on bonds could indicate market participants are anticipating a material slowing of the economic growth which has persisted in recent years. However, an increase in inflationary rates or increases in interest rates beyond those already anticipated could offset the recent rally and further pressure the fixed-income market.  

The European Union implemented an oil embargo on Russia, as the continent continues to feel the ramifications of the Russia-Ukraine conflict

With all 27 bloc countries on board, the embargo is projected to affect ~90% of the region’s total Russian crude imports by year-end. The imposed lack of demand has caused the estimated value of weekly Russian crude oil shipments to jump from $1.7 billion on May 22 to $3.46 billion on May 29, the highest figure since the start of the war. Similar to the beginning of the invasion, the price of oil will rise, with Brent crude oil already hitting a two-month high of $119 / bbl this morning. The EU has other tools in its back pocket it could use against Russia should they believe the punishment is too light. Imposing restrictions on tankers or targeting insurance would inflict more damage than the current embargo. The credit team will continue to monitor this situation vigilantly moving forward as energy and oil disputes cause ripple effects throughout the global markets.

Congress is currently amid a several months-long debate that appears to be in a stalemate in which provisions include $50 billion in government spending to bolster the U.S. semiconductor manufacturing industry

Commerce Secretary Gina Raimonda warned at the 2022 World Economic Forum’s annual meeting in Davos, Switzerland that the prolonged delay has the potential for long-term domestic repercussions if Congress remains stalemated. Lack of action could prove to be permanently detrimental to the U.S. economy, as some companies’ backs are now against the wall, and desperation may force their hands into moving manufacturing overseas. It is well known the U.S. has been rapidly losing ground in the growing $556 billion industry (according to the Semiconductor Industry Association). The U.S. presence in semiconductor manufacturing sits at a meek 12% today, down from 40% in 1990. When further analyzing the U.S. market share, 0% of the world’s supply of the most advanced logic semiconductors were manufactured on domestic soil in 2019. Semiconductor manufacturing has transformed into a national security issue, and any overdependence on foreign production poses a major risk if conflicts heat up. President Joe Biden praised Intel’s plan to spend $20 billion to produce semiconductors in Ohio, however that is contingent on the bill being passed. If companies are not incentivized to produce in the U.S., their departure to foreign facilities will only widen the increasing gap between the U.S. and our commerce rivals.

All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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