Sunday Signposts | Thoughts on Global Macro from Joachim Fels | August 20, 2017

Sunday Signposts | Thoughts on Global Macro from Joachim Fels | August 20, 2017

I’m taking a few days off to drive up California State Route 1 toward Big Sur as far as possible, given that the most scenic part is still blocked due to the big landslide earlier this year. So all I can offer today are a few quick notes from the road scribbled on the back of a postcard.

Santa Barbara is an ideal spot for a stopover to take in the Spanish colonial heritage and the stucco architecture and, of course, to enjoy the vibrant local food and wine scene. Start a visit with the panorama view from the tower of the historic Courthouse – the Santa Ynez Mountains provide an impressive backdrop for a Cityscape of green trees, white-washed buildings and red-tiled roofs sloping down gently towards the blue ocean. I now understand why they call this the American Riviera.

However, once you climb down the tower and start strolling down State Street towards Stearns Wharf, brace yourself for a reality shock. This is downtown Santa Barbara’s main shopping mile, and it is immediately obvious that the slump of bricks-and-mortar retail has arrived here, too , and with a vengeance: On each block of State Street, more than a few prime retail sites are vacant and available for lease or sale. A quick Google search reveals that the local press puts some of the blame on what is described as Santa Barbara’s “perpetual homeless panhandling problem”. I have no idea whether this is true, but I doubt it. In Santa Barbara, as elsewhere across the country, the plight of main street retailing more likely reflects the disruptive impact of online shopping on commercial retail property – just check out the popular website for the broader picture.

Of course this doesn’t mean the U.S. consumer is also in a slump – we rather buy more online and watch movies on Netflix or go out dining while waiting for Amazon to deliver. Actually, finding a table at a Santa Barbara restaurant or winery on Saturday night wasn’t easy, though it worked out in the end and was worth the wait. And country-wide July retail sales (which include non-store retailers) released this past week showed a nice rebound, supported by, guess what, Amazon’s July Prime Day, which broke the companies’ previous record for sales and surpassed Amazon’s Black Friday and Cyber Monday sales. Tiffany Wilding, PIMCO’s U.S. economist, estimates that the revisions to the past few months’ retail sales push up 2Q overall real consumption growth to 2.8% saar, and her early tracking estimate for 3Q consumption growth now stands at 2.5% saar.

The Fed isn’t concerned about consumer spending either – inflation, or the lack thereof, is the greater worry.
The FOMC minutes released last Wednesday stated that “reports from District contacts on consumer spending were generally positive” and “Participants noted that the fundamentals underpinning consumption growth, including increases in payrolls, remained solid.” However, the minutes reveal that the FOMC had a thorough debate on the appropriateness of the Philipps curve framework that links inflation to unemployment. While “most participants thought the framework remained valid”, the confidence in this view appears to be waning with recent inflation and wage data. In fact, a whole host of reasons was mentioned why wages/prices hadn’t responded more to falling unemployment. And with the inflation data released since the July FOMC minutes showing yet another downside surprise , the chances of a dovish shift in the Fed’s own “appropriate policy” path for rates at the September meeting are increasing.

OK, I’ve now filled up all the available space on this postcard and it’s high time to get back on Route 1 heading further north. Enjoy your own real or virtual shopping experience or road trip or whatever else you may be up to this Sunday!


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