Encouraging Early Read on Holiday Spending

Stocks and bonds opened higher this morning, reacting to a speech from Federal Reserve Governor Christ Waller. He suggested that if current trends in growth & inflation persist, the Fed won’t need to raise rates further. In other words, lower inflation gives the Fed room to “wait, watch and see how the economy evolves before making definitive moves on the path of the policy rate.” He even hinted at the possibility of rate cuts next  year. This is the type of messaging traders want to hear, and which Fed officials have generally avoided.

Bloomberg News ran an article explaining “Why Americans hate the economy.” While the rate of inflation is clearly slowing, prices for some household goods and services are still significantly higher than pre-Covid levels. Compared with January 2020, groceries are up 25%, restaurant food is up 24%, water & sewage services are up 16%, electricity is up 25%, car insurance is up 33% and used vehicles are still up close to 35%. Prior to the pandemic, it took about 10 years for prices to rise that much. Clearly, this is weighing on consumer sentiment.

Nevertheless, research by Adobe Digital Insights suggests consumer spending between Thanksgiving & Cyber Monday was better than expected, rising 7.8% from a year ago. And spending on Cyber Monday alone increased nearly 10% to a record high. I want to highlight a couple of drivers of this outperformance. First, some retailers offered discounts, which boosted demand. Also, buy-now-pay-later financing options are quickly gaining popularity as a way to avoid extremely high credit card rates. CNBC reporter Mike Santoli says the level of spending suggests consumers are in decent shape. Rather than “mass consumer fatigue, it’s more like some fraying around the edges.”