China’s economy is beginning to re-open. While this is a positive development for the global economy, it may lead to increased oil demand at a time when supply is already tight. Historically, periods of high inflation in the U.S. have been followed by a recession. So far there’s no sign of a slowdown in consumer spending. Credit card debt has returned to pre-Covid levels, but consumers still have more in savings than they did prior to the pandemic. Mortgage rates are elevated relative to the 10-year treasury. Imports of semiconductors continue to surge. As supply chain issues are resolved, retailers may end up with more inventory than they need.
1. The Chinese government is declaring “victory” in it’s most recent battle with Covid:
2. U.S. Oil inventories are at their lowest point in the past 15 years:
3. Rising inflation is often a late-cycle indicator, leading to tighter financial conditions and reduced consumer demand:
4. As noted by Bloomberg’s Joe Weisenthal “aggregate 2022 levels remain well above recent years. However [Bank of America] notes that total growth y/y is running below the headline rate of inflation, which means that real consumption may be running lower — people are spending more but taking home less real stuff”:
5. Higher credit card debt may be a function of spending returning to “normal” as opposed to a stressed consumer:
Source: The Daily Shot from 6/8/22
6. Household savings and checking balances remain nearly double pre-pandemic levels:
7. Mortgage-backed securities may be attractive due to their relatively higher yield:
8. More semiconductors could help alleviate shortages in key industries, most notably automobiles:
9. Retailers may want higher inventories to mitigate the impact of future supply chain issues, or they may have simply misjudged the level of future demand: