Government Shutdown and the Consumer

Jan 14, 2019
Women shopping with bags in hand

Government Paralysis and the Consumer will be Market Focus This Week

The market entrée this week will be the ongoing government shutdown with a side-helping of consumer-level reports that will give us a look at the health and wellbeing of the all-important consumer. As for the government shutdown, while the aggregate impact to the economy continues to be minimal (but try saying that to the 800,000 employees that just missed a paycheck),  the markets’ perspective is more on the amount of dysfunction and the fact other important issues need to be dealt with in the coming weeks/months (like the March expiration of the debt-ceiling agreement). Meanwhile, much has been made of the late-year volatility and the impact it might have on consumer sentiment and we’ll get our first taste of that on Friday with the Univ. of Michigan Sentiment Survey. Before that, December retail sales, housing starts and new home sales will give us the consumer’s pulse and proclivity to spend which is vitally important in an economy that is two-thirds dependent on consumption.


Treasuries

Treasuries

Short-Term Rates

Short-term Rates

Economic Calendar

Economic Calendar

 


calendar icon Top 5 Events for the Week

 

JAN. 14-18,  2019

1. Government Shutdown Developments — All Week
2. December Retail Sales – Wednesday
3. U. of Michigan Consumer Sentiment — Friday
4. New Home Sales & Housing Starts — Mon./Thurs.
5. Industrial  Production — Friday
 

 

1.  Government Shutdown Developments – All Week

As the ongoing government shutdown reaches the longest in U.S. history the aggregate impact to the economy continues to be minimal (but say that to the 800,000 employees that just missed a paycheck). The market’s perspective, however, is more on the increasing level of dysfunction and the fact other important issues that need to be dealt with in the coming weeks/months (like the March expiration of the debt-ceiling agreement). With the inability to keep basic functions of government open and operating, investors are right to be concerned when more consequential matters are at hand. That reality is likely to keep a bid in Treasuries, and if the dysfunction continues and/or increases, consumer sentiment is likely to suffer and consequently consumer consumption will slow as well.

 

US recession probability rises to one of highest levels of the expansion

 

2.  December Retail Sales — Wednesday 

The December Retail Sales Report is due Wednesday (if it’s released at all given the shutdown) and expectations are for most key metrics to be decent but off the strong November readings. The report gains added significance since many brick-and-mortar retailers (see Macy’s and others) posted ugly holiday-season sales numbers. The all-important Control Group reading (which is a direct GDP input) is expected to post a decent 0.4% gain but that will pale in comparison to November’s 0.9% pop. Overall sales are expected to increase 0.1% month-over-month, short of the 0.2% gain in November while sales ex-autos & gas are expected up 0.4% versus 0.5% in November. The decent expected reading in the control group after the moonshot in November should keep fourth-quarter GDP estimates in line. The Bloomberg consensus estimate is for GDP to increase 2.6% as consumer consumption eases slightly off the 3.5% third-quarter splurge.

 

3.  January U. of Michigan Consumer Sentiment — Friday

The preliminary read on January consumer sentiment is expected to print at 96.8 compared to December’s 98.3 and off the high reading of 101 last March.   The sentiment index has averaged 98.4 over the past year so a below-trend reading is expected and that’s reasonable considering the recent spate of stock market volatility and political dysfunction. The survey also has two inflation measures that are watched by the Fed. Consumers expect inflation over the next year to be 2.7% and the longer-run expectation (5-10 years) moderately lower at 2.5%. The inflation expectations have been fairly steady but have been slowly edging lower of  late. Given the retreat in retail level inflation measures in recent months the Fed will be attuned to any drift lower in inflation expectations by consumers.

 

4.  New Home Sales and Housing Starts — Monday/Thursday

Housing was the first sector that started to show the effects of higher interest rates as the level of activity, both in sales and starts, moderated in early 2018 with activity plateauing and then moving slightly lower as the year rolled to a close. This week, if the government allows, we’ll get new home sales for November which are expected to show an uptick of 4.2% (567k annualized) versus October which was the low print of the year by a wide margin at 544k. Thursday may bring housing starts for December and those are expected to decrease -0.2% while building permits are expected down –2.9% on the month.  In summary, the latest read on the housing market is expected to show a sector muddling through without any sign of lifting but also showing little signs of another leg down.  The November and December time period is too early to assess any uptick in activity that may develop following the recent drop in market interest rates. That impact, if any, will likely be felt in the February and later reports.

 

5.  November Industrial Production—Friday

Expectations are for November industrial production to increase 0.2% month-over-month versus 0.6% the prior month.   The average over the past year has been 0.32% so a slight below -trend print is expected. Stripping out the volatile utility component manufacturing is expected to be up 0.3% versus unchanged the prior month.  The average over the past year has been 0.2% so an above-average print is expected. Finally, capacity utilization is expected to be unchanged from the prior month at 78.5%. In total, a decent read from the manufacturing/industrial sector is expected and may provide another data point that says the goods-producing economy continues to perform solidly despite tariff wars and other off-shore weakness/concerns.

 

 

 


arrow up icon Investment Yield Ranges Over Last Year

 

US Treasuries

FHLB Agency Bullets

Mortgage Backed SecuritiesMunicipals

US Corporate - Financials

US Agency Swap Rates

 Source: Bloomberg

 

 

 


 

Tom Fitzgerald Signature

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

 

Download / Print as a PDF