Risk of overheating? Tailwinds? In fact, quite the contrary

The story told by the consumer doesn´t leave much doubt that the economy is on a “cooling streak”.

The chart shows that retail sales (just as several other statistics) captured the burst of activity triggered by the cleanup and recovery from the severe storms along the Gulf Coast in late summer 2017, with growth in sales strongly positive in September-November.

That, however, has long gone, with a string of three negative rates in December/17-February/18.

Today´s release gave rise to significantly negative market reactions, with stocks, the dollar and long-term yields falling.

Overall consumer spending, available to January, also tells a story that does not correspond to the “overheating” & “tailwinds” now favored by the top people at the Board of Governors of the Fed.

Capturing overall market sentiment about future economic prospects, yield spreads (10yr-1yr), indicate those prospects are not getting better. Sometimes, sentiment changes abruptly, as happened when Trump was elected, giving rise to the (short-lived) Trump bounce. Since then, it´s been mostly downhill.

Some argue that “this time it´s different”, appealing to the negligible term premium to conclude that the efficacy of the yield spread indicator has fallen. A recent study by the San Francisco Fed puts those qualms to rest.


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