Consumer spending is now weakening in the US, as inflation takes its toll. The Conference Board’s expectations index for consumer confidence is finally catching up to the slide in the University of Michigan consumer sentiment. For May, the median PCE jumped 0.58% m/m (matching the CPI) – the largest single-month increase since July 1982. The Fed can’t relax yet.
Yet the y/y for the core consumption deflator is turning down. And breakeven inflation rates are sliding, following the drop in industrial metals. The latter is leading oil prices lower. Markets are beginning to price in a recession, and a ‘normalisation’ of inflation expectations.
It is now tempting to buy back into 10-year US Treasuries at this juncture. The yield curve between 2s and 10s should also invert, possibly by up to 100 basis points. To be clear, this is not a buying opportunity for stocks just yet. Commodity prices may need to fall a lot further before sentiment towards growth stocks shifts.
And the longer the bear market in technology stocks continues, the harder it will become for private equity companies (PE) to avoid substantial asset write-downs. At some point, more questions will be asked about how accurate, reliable, or trustworthy the underlying valuations of companies held privately really are.
Europe could yet be at the epicentre of the next crisis because it is more exposed to the threat of Russia cutting off gas supplies. Electricity prices for December have surged across Europe, including in France.
Summary
• Treasury yield curve may invert significantly
• Electricity prices surge in Europe; high yield under stress
• Private equity valuations questioned
