Next week, we get retail sales and inflation data. The economy has been more than resilient – the economy has been strong. Employment numbers are strong – non-farm payrolls came in last week far better than expected. GDP numbers are strong – showing continued resilience in the economy and the consumer.
Next week, with inflation data and retail sales, I wanted to preview a potential outlook of what these numbers could look like. More importantly, I wanted to show how I am fronting the numbers.
Inflation data have been moving closer and closer to the Federal Reserve’s target rate to 2.00%. The Federal Reserve has made it clear that they are intent on containing inflation. In a recent interview on 60 Minutes, Federal Reserve Chairman Powell stated that right now, the Fed sees inflation moderating but that there is a ways to go yet. The Fed is going to want to have a clear path forward with inflation being contained before any moves in interest rates occur.
That being said, the economy is resilient. It may be that inflation is not entirely contained and the recent economic data consul show that the pace of decline in inflation may actually be, well, declining. Given this, with employment gains, increases with personal consumption and expenditures, the results may be that we see inflation continue to decline, but at a declining rate.
Also, retail sales are likely to come in robust – the past two months’ data have each been a 0.6% MoM increase.
Personal Incomes
For me, all of my analysis starts with personal incomes. While there are many inputs in to the economy, the driving force that would move the economy the most would be the rate of growth for personal incomes.
Personal incomes are the math of more and more individuals being added to payrolls – and their respective incomes increasing the level of potential expenditures. But, individuals that see an increase in their respective incomes would also simultaneously drive incomes up or down.
This rate of growth, up or down, is what drives consumption, or expenditures. And, as can be seen above, incomes are increasing and this is driving consumption upward.
Inflation Expectations
Given this, my thinking ahead of the next releases is that potentially we see the inflation rate remain lofty and that any surprises would not be to the downside of lower levels of inflation.
If you look at the chart above, this is CPI inflation (red) versus Personal Consumption (blue). The lines are not entirely perfect, as the correlation is not a perfect 1.00%. But, there is a correlation, nonetheless. Given that, consumption is starting to trend back upward.
An important aspect to keep in mind is that inflation is delayed, if but a few months. This makes sense. As there are increases in expenditures, it takes time for demand and consumption to work through the curve.
You can see within the chart above that when there are movements up or down with consumption – blue – inflation shows up a short time later.
As I have stated numerous times, consumption is moving up on increasing year-over-year changes to incomes.
Retail Sales expectations
As the charts above show, retail sales have dipped and are starting a move back upward. Retail sales are another form of expenditures, simply more defined. And, along with personal consumption, retail sales are heading higher.
What to Expect
Next week, with inflation data & retail sales, there is one thing that I can rule out: a surprise to the downside. Between the two data points, I expect that there will be an increase in one that surprises to the upside.
Keep in mind, last year after seeing an accelerated increase in interest rates, the economy moved forward less rapidly. This year, when considering the rate of increase in growth compared to last year, I expect the increase to be higher.
Given that, I can see interest rates staying lofty and moving somewhat higher. Because of this, I will be structuring a trade to take advantage of either TLT stock moving lower, or at the least heading sideways. Likely, I will be doing a short call strategy.
I may do a credit spread whereupon I sell the $96.00 calls and buy the $97.00 calls. At the very least, I would limit my risk if there is a surprise. Likely, I would pull in about $0.12 for the credit spread. If I did this every single week for the next 50 weeks, I am sitting on $6.00 in profits on about $96.00 in margin.