Macro Catalysts for Volatility in Yields with a Bright Spot

Jeffrey Roach:

Hi, I am Jeffrey Roach, chief economist for LPL Financial, with an update on what's happening in the global markets and the call to action for investors. First bond yields recently fell because of less inflation pressures. Here are the details. Bonds reacted to the decline in real disposable incomes and the corresponding decline in real good spending. Now, it's important to note that household spending is still on two very different tracks as consumers pull back on their spending on stuff, but continue to grow their spending on services such as healthcare and housing and childcare. Bond yields also fell because the latest inflation metric showed that pricing pressures have eased up a bit from the fast clip. Earlier this year, the annual rate of headline inflation was 2.7%. Now overall, the Fed will want more clarity on the inflation front. We still expect the Fed to stay on hold in the near term, barring any shocks.

Jeffrey Roach:

Second, consumers are getting more price conscious. Consumers are pulling back a bit on discretionary spending and becoming more price conscious. Something we read about in the latest Fed Beige Book, and it explains why major retailers and some fast-food chains are coming out with some real deals. In fact, recent industry data on auto manufacturers have really dialed up incentives. The average incentive spend from manufacturers is double from just a year ago, reaching the highest level since May, 2021, and pushing incentives as a percentage of average transaction price to close to 7%. Now, it's not a surprise as inventories have steadily increased in recent months. Like I said, last year, summer of 2024 may be a good time to start car shopping again. Now, as we look ahead, as consumers get more price conscious, we should expect to see some pressure on profit margins. Third, business spending could be a bright spot this year.

Jeffrey Roach:

On the positive note here, we just heard that business fixed investment was revised higher for the first quarter as businesses invested in artificial intelligence and other technologies. So the bottom line is yes, momentum is slowing as consumers struggle with lingering inflation pressures, but a bright spot in the macro landscape is solid business investment as firms continue to invest in those new technologies. We should expect inventory investment to give a small boost for economic growth in the second quarter. But investors should expect some slowing momentum through the balance of 2024. Now that's all for now, and if you want more insights on global market trends, follow us on social media and take care.