May in America

For those of you who would prefer to listen:

America’s Economy keeps chugging along, despite so many signs of slowing. Consumers keep consuming. That’s critical as consumer spending accounts for 70% of US GDP. They have certainly changed their interests and habits though. Americans keep buying less stuff and are spending more out and about. It’s been a complete reversal from Covid.

I was on the road again this week. I certainly wasn’t the only one. Airports, hotels and restaurants are still jammed. That’s the case from coast-to-coast. 2.6 Million people went through TSA checkpoints yesterday. It’s 300K more than a year ago and matches this date in 2019. It’s May in America. Graduation and Summer vacations are fast approaching. That part of the economic engine is still humming. It’s also one of the areas where inflation is most sticky.

Prices are still really high. Services inflation is staying elevated primarily due to increased shelter, labor and transportation costs. It’s estimated that for every $100 spent on lodging, $220 is spent elsewhere in the system. Restaurants, cafes, event planners and Uber drivers benefit here. That’s how America’s Economy works.

April retail sales posted a 0.4% monthly increase which was still below the 0.7% expected. Retail has steadily declined since last Summer. This April report saw retail sales increase just 1.6% over the trailing 12 months. That is below the 4.9% inflation rate for the same period. That means higher prices account for the increase. Some of the price increases are covering the rampant increase in theft. It’s a serious problem. We are still paying much more for less.

Consumers have continued to shift away from goods spending like furniture, home appliances and electronics. Those were the areas that experienced hyper-demand during the pandemic. Spending has been diverted towards services such as travel and restaurants. They’re opening their wallets away from the home. But at the store, shoppers are trading down to cheaper brands and they’re cutting back on buying non-essential goods. There is belt-tightening going on.

Americans are cruising like never before. After a near collapse of the industry from Covid, a record number of passengers are expected to hit the high seas this year. 32 Million are set to cruise in 2023, outdistancing the 30 Million in 2019. That was the record. Nearly 70,000 people passed through the Port of Miami in a single day last month. That’s also a record. There were 8 cruise ships docked that day. Cruising plummeted in 2020, with just 11 Million passengers across the next 2 years. The lockdown crushed cruising. It’s made a remarkable comeback.

Optimism was building on the debt ceiling debate. House Speaker Kevin McCarthy said that an agreement to raise or suspend the debt ceiling could come this weekend. That would lead to a vote on the bill on the Hill next week. The Market sure liked it. But word broke Friday that talks stalled a bit. The Market did not like that.

Washington games are still being played. It’s also being reported that frustrations are building within both Democratic and Republican hardliners. They don’t want a deal. They don’t want to compromise on anything with the other party. This is all politics. I need not remind you how divided our government is.

Fortunately, the American people do want a deal and leaders in the Federal government have been moving on it, just not as swift as necessary. May 31 could be an expiration day for Treasury’s ability to pay its bills. It’s coming quick.

Here’s something important: The Dollar reached a 2-month high this week, reflecting the optimism and proving its role still as the universal currency. It certainly is being tested, for better or for worse.

The soft versus hard landing debate continues to rage on. Consumer spending keeps propping the Economy up. But Americans are proving to be more and more scrutinizing in their spending. Inflation is still a problem. Debt levels are rising and retailers have noticed a demand slip. Even Walmart is experiencing a slowdown in higher ticket items with groceries being the primary grower at checkout. Whatever the landing looks like, the Economy is coming down. The process is almost always bumpy.

Stocks had a good week, taking the S&P to new highs for the year. It’s still well below the peak levels from the 2021 bubble. Price action has been sideways for months, currently sitting at the high end of the range. The Market is still dealing with a lot of moving pieces surrounding some significant themes.

Then there’s this: Leadership continues to be quite narrow with just a handful of stocks carrying the load. The Tech Titans have been flexing their muscles showing their strength. AI is the clear secular growth story and investors have been chasing the theme driving those stocks higher. There are some bubble-like conditions in play again.

Taking a broader view, the Market is still struggling for meaningful direction. It’s not too surprising given all the moving parts surrounding the high-profile themes. Namely, that’s the Fed, the debt ceiling, earnings, and the Economy. These issues aren’t going away quickly or with ease. All eyes will be on Washington this weekend for insight and updates on a deal.

The Market still expects the Fed to pause its interest rate hike campaign next month and start cutting this Fall. That still seems highly unlikely and the Fed keeps asserting higher for longer with an increasing probability of another rate hike ahead. They’re saying different things. The Stock Market has gotten excited again.

A debt ceiling deal could lead to a rush to buy Treasuries again. And the Treasury will welcome that demand as it needs to build up its coffers after having drained them to avoid default. That would no doubt impact the money supply and could drain more liquidity from the banks. But a default would be avoided. It’s one of the many costs of this unnecessary political game of chicken.

Friday was an options expiration day. That always brings increased volatility. It can both exacerbate and confuse the underlying fundamentals. That was definitely the case in the final hour of trading. There’s certainly much at play this May expiration day.

Have a nice weekend. We’ll be back, dark and early on Monday.


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