Jones said it remains to be seen if the Fed will let up on the gas to tamp inflation in time. “If we’re right and things slow down later in the year and the Fed doesn’t have to be as aggressive as they’re talking about ... I’d say the positive risk reward is probably in that more intermediate to long-term part of the curve than in short-term where it’s already priced in.”
Sonders said Fed indicators such as the ever-decreasing spread between consumer’s assessment of their present situation and their expectations for the future present “a dour outlook.”
“The spread between these two indicators has never been as low as it is right now other than when we were already in recession or the lead-in to recession,” Sonders said. While GDP and the labor market have been strong and wage growth is up, “the weight of inflation” is weakening consumers’ expectations for the future,” she said.
Consumers believe that, “‘Yeah, things are OK right now, [but] I don’t anticipate them to stay well. I am looking at a pretty significant deterioration in my own situation six months down the road,’” she said.
“We’re also seeing a weakening in capital goods spending and in household durables so I think a lot of the consumer side of the economy metrics—and it really surged coming out of the lockdown phase—have at least started to roll over if not started to display inflation-type weakness,” Sonders said.
She said “the dynamics of the housing market are concerning right now. When I talked about some of the more cyclical areas of the stock market underperforming significantly this latest rally, that would be inclusive of household durables and homebuilders.”
With mortgage rates up, “you’re seeing mortgage finance companies recently underperform even in this rally. So, the messages are pretty strong that we may have started to roll over in terms of housing," she said. "But I think it’s a more benign move on the downside certainly than what happened back in ’08."