BOUNCE BACK

Despite widespread focus on policy decisions, tariff and trade relationships, and other global issues, consumer activity remains the dominant growth factor for most economies. We should emphasize that consumers do not represent one monolithic entity: Consumer activity varies by a number of attributes including age, geography and income, and our efforts will continue to decouple the underlying factors.

In the U.S., Adobe Analytics noted a record $11.8 billion in Black Friday sales, led by AI-driven e-commerce traffic, and that Cyber Week, which measures the five days from Thanksgiving through Cyber Monday, saw a 7.7% increase from last year. Moreover, the $44.2 billion in Cyber Week spend exceeded expectations of $43.7 billion. In Europe, retail sales heading into the holiday season have been more tepid, with only mild improvements in consumer sentiment in Germany, and the picture in aggregate is still sluggish — including in the U.K. China’s retail “Singles Day,” which has grown from a singular event by one retailer into a multi-week, pan-Asian campaign, witnessed more mixed results that most analysts have described as “tepid.”

One of the key themes across geographies is a highly promotional environment; consumers are seeking deals and incentives to get them to spend across categories such as beauty, electronics and more aspirational categories. We expect ongoing divergence across cohorts, but, in aggregate, we anticipate a resilient domestic consumer. A weaker jobs picture and consumer overextension into the holiday season are risks we continue to monitor. 

While markets are appropriately focused on an interest rate cut or hold coming out of next week’s FOMC meeting, investors are perhaps more interested in dynamics surrounding voting-member outlooks and future Fed leadership. Recent December rate-cut probabilities troughed at 29% on November 19: But, as of this writing, they hover in the upper-90% range following a benign Personal Consumption Expenditure data release on Friday, which remains the Fed’s preferred consumer inflation gauge.

Fed Chair Powell is known for consensus-building among policy voting members: St. Louis Fed data cites Powell as the Fed chief with the least number of dissenting votes among all Fed chairs going back to Paul Volcker. New membership, mixed perspectives around inflation’s persistence relative to a softening labor market, and the White House’s increased attention on announcing Powell’s eventual replacement have kept markets focused on Fed press conferences and statements. We agree with the consensus expectation for a 0.25% interest rate reduction next week, and subsequent Fed statements suggest emphasizing optionality and data dependence.

The U.S. dollar, as measured by the DXY index, had its worst weekly performance since the summer, with the dollar falling for nine straight days until a slight increase on Thursday broke the trend. While dollar weakness is not a new phenomenon, the greenback remains above its lows for this year, reached in mid-September. Among other factors, dollar weakness has been driven by central banks and sovereign treasurers diversifying away from dollars and by interest rate differentials becoming more attractive in countries like Japan, but we do not view the dollar’s decline as concerning from a portfolio perspective. We view bond market factors — specifically the levels of interest rates and credit spreads (i.e., the extra yield compensation for owning non-government bonds) — as more important portfolio risk indicators. Should we see weak government bond auctions, a sharp increase in interest rates or widening spreads along with weaker corporate issuance trends, we would have more concerns about the forward path.

Despite rampant press coverage of dollar challenges, the dollar has remained in a solid uptrend versus major global peers since the 2008-09 crisis. While currency risk is an important portfolio consideration, maintaining portfolio diversification across many factors is more important than reacting to the near-term noise in the dollar. 

In periods of global economic challenges or strength, central banks tend to deploy similar tactics; they slash interest rates and buy assets to spur economic activity during crises and raise rates and sell assets to cool an overheated economy. Given mixed inflation and growth impulses around the world, we anticipate a more reactive central bank environment, with most central banks on pause pending trade policy changes and U.S. central bank activity.

Japan represents an exceptional case, and developments over the past two weeks and into Japan’s next policy meeting bear watching. For decades, Japan’s deflationary spiral has gripped the country, leaving borrowing costs and nominal (non-inflation adjusted) bond yields at low levels relative to major global peers. With some inflationary forces emerging, Japan is poised to raise interest rates during its December 18-19 meeting, driving 10-year Japanese government bond interest rates to 18-year highs. Low Japanese yields have helped foster lower borrowing costs in global finance. However, should Japanese policy rates and yields continue to rise, this could represent a headwind for consumers and businesses. We will continue to monitor events across global central banks, despite the market’s focus on domestic outcomes.