The Fed can’t do anything about the supply of goods and services but does control the creation and destruction of economic demand. In 2020 and 2021 the Fed was creating demand, or at least attempting to, via loose monetary policy and quantitative easing. Those days are over. The remainder of 2022 is about the Fed’s plan for demand destruction in order to curb inflationary pressures. Higher rates, less spending. It’s already started.
This morning’s retail sales data was soft across the board. Nominal retail sales fell -.3% for the month, with auto related sales down -3.5%. Retail sales and food services just +.1%, the weakest of 2022. Quarterly consumption revised down, and prior month retail sales revised down. Retail sales are clearly softening. Whether the root cause is a weak stock market, higher gas prices, higher mortgage rates, higher food costs, or just generally higher borrowing costs, consumer demand is waning.
In order for the overall market to stabilize, demand needs to soften, inflation needs to start peaking, and yields need to both stabilize and head lower. This might take 6 months to do but “demand destruction” is already underway and it’s actually (and strangely) a good thing.
The Fed hikes at 2pm ET – enjoy the show!
Chief Investment Officer
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