What’s weighing on the mind of U.S. consumers as sentiment falls in August

Chad Oviatt, Director of Investment Management, Huntington Private Bank, joins Yahoo Finance to discuss the outlook on inflation following the latest economic data, the outlook on Fed tapering, and moves in the bond market.

Video Transcript

- All right. I want to continue this market conversation. We're joined now by Chad Oviatt, director of Investment Management at Huntington Private Bank. Chad, great to have you here with us.

So let's just start with inflation, just because we got some of those inflation figures out this week. Of course, PPI jumping again to a record high, 7.8% year over year, so higher than had been expected. Now I was reading some of your notes, and you mention inflation and where you see inflation going.

So I wanted to just throw this to you, since we've been asking a lot of folks lately just how durable they see inflation being. So how transitory do you really view some of these inflationary pressures?

CHAD OVIATT: Well-- and that is a big question. It's on the minds of not only market participants, but also consumers. You can tell by the data that was just provided by Jerry, that consumer sentiment certainly influenced by the idea of inflation, as well as the Delta variant having some certainly negative impact or concerns in the minds of consumers.

But when we think specifically about the inflation component of that, you're right. We do see inflation coming in probably around that 3 and 1/2% range for the year. Numbers on a year-over-year basis. CPI this week, 5.4. The PPI at 7.8, well ahead of expectations on the producer side.

So we absolutely are looking at higher inflation. The term transitory to us still needs a little bit more definition. The question becomes, what is that specific time frame for transitory? Is it a matter of months? Is it a year or more? For us, what we've been doing for our portfolio positioning for our Huntington clients is looking at a post-recession positioning in portfolios. So we don't see a recession on the horizon.

But we've also been putting an eye on inflation for a couple of months now. So we've been putting in investments that would be traditional inflation hedges, like precious metals or real estate, and on the fixed income side, looking at TIPS as well.

- Well, keeping the discussion around inflation, there's one more data point I just want to throw up from that UM consumer sentiment report. And that is the 5 to 10 year-- oh, excuse me. The one year inflation expectations. That is at 4.6%. It was 4.7% last month.

And yet you have the sentiment number crashing to 70. Is there some kind of fear that consumers might simply retrench at this point?

CHAD OVIATT: And that's largely the concern from that sentiment number, is will the sentiment lead to a change in behavior? Is that going to move the needle on the way that people spend? Keep in mind, we're in the back to school season. So another thing that's weighing on the minds of consumers is will their kids be able to get back to school? Are there challenges with schooling, whether that be schooling from home or child care needs.

So there are some questions around the sentiment numbers. Will it change behavior? That one is going to be a wait and see moment.

- And Chad, we heard at least two Fed officials just this week striking a little bit more of a hawkish tone. I noticed in your notes, you have a timeline of when you think that tapering might begin. Has that timeline at all changed, especially after we've got some of these stronger numbers in the labor market and at least when it comes to these inflationary headline figures?

CHAD OVIATT: That's right. And so what we're looking at, the September meeting of the FOMC is going to be very important in our minds. We think that they'll start to have that tapering decision somewhere in that September time frame.

Keep in mind that the Federal Reserve right now is buying $120 billion a month in fixed income instruments-- 80 on the Treasury side, 40 on the mortgage side. So we think that tapering becomes a real topic of discussion. We think there's going to be action there.

And if you were to look at our yield forecast for something like the 10 year Treasury, we do think that we get to a trading range of 1 and 1/2% to 2% later this year, largely on the idea that one of those big buyers that's influencing the current yields is going to be stepping away in the form of tapering.

- One of the other catalysts, which is kind of on the way out right now, is earnings season. And we're having if not record beats, nearly record beats. But heading into the next quarter-- going to be reporting on the third quarter here-- what do you see in terms of expectations, and do you see them being dialed up or dialed down into the actual next earnings season?

CHAD OVIATT: Yeah. Thanks, Jared. I'll tell you, our equity team here at Huntington has been doing a lot of work around earnings season this quarter. And earnings-- I think you probably have been reporting on how great Q2 was. 86% of the S&P 500 companies beating expectations, 94% plus type year over year earnings growth.

So as we look forward to Q3, what was interesting about Q2 is that margins were actually pretty good and forward guidance was also really good. So when we think about Q3 earnings, we're still very constructive on that. We had been thinking that Q4 may be a little more challenging. We're starting to think that Q4 may also be pretty good. We're going to continue to see growth.

Q1 might be the quarter that we start to get a challenge. In fact, we did raise our S&P 500 estimates or our target for the end of the year. We're at 4,600, which, from an earnings perspective, we think that that index gets to a new round number by the end of the year. We're thinking 200 earnings per share there, with a 23%-- or a 23 multiple on that.

- Chad, I'm looking at the 10 year bond yield right now. It's in the red, down about 4 and 3/4% right now. And we've seen at least the yields really seesawing quite a bit lately. If you had to read the tea leaves right now from the bond market, what do you think it's telling us?

CHAD OVIATT: There's a lot of crosscurrents there, kind of head scratchers, if you will. If you think of some of the economic data, as Jared mentioned, that we've been getting, it's positive. It's pretty robust. But there are concerns about the Delta variant. Will it slow the potential economic activity in the back half of this year.

You also have a lot of foreign buying. You know, if we think about the amount of negative yielding debt around the world, we're north of $16 trillion in negative debt around the world. So people aren't getting the yield on those instruments. They're going to be looking here to the US for a high quality issuer that still has a solid yield. So there is that supply-demand effect going on from folks wanting either safety, due to what they think could be disruptive in the economic environment due to Delta, or they're looking for the best deal they can afford.

The other is that as these equity markets have performed so well, there is some thinking that there's rebalancing going on as well. You're trimming from those higher positions to add to maybe some of your lower positions or things that haven't appreciated as aggressively as the equity markets. And that would be fixed income, for example. A 60-40 type portfolio, you may be rebalancing slightly out of equities and fixed income. And that also could add to that demand side of the supply-demand equation going on in fixed income.

- All right. I want to switch gears here. I know it's only August, but people are already thinking about the holiday season for a couple of different reasons.

FedEx only today announced that they're going to be hiking rates, I believe, as of November 1. We have Chinese ports shutting down right now. We've got log jams in August. Just kind of any insights you have for the holiday season in general, based on your window, especially given your access to consumer data that you have.

CHAD OVIATT: Sure. Great question. And I think that correlates a little bit to what we saw in those producer price indexes, and that is that supply chains are still having some bottlenecks. There's disruptions. There's input costs going into all kinds of different industries right now that are increasing.

But when you think about those shipping lanes being constricted, as you mentioned-- today we got news that a Chinese port is under restriction due to COVID. There's roughly 40 container ships just in that port alone. So it is going to start to slow those shipments.

Containers actually-- a shipping container or a 40 foot container just reached a record high last week, clearing $20,000 for just one container. So retailers, in particular, when we think about the holiday season, are trying to rethink the way that they get their inventories to market. And that can have to do with shipping. That can have to do with other supplies being driven into those stores.

So there is disruption happening, and that's likely to continue to drive prices a little higher. But fortunately enough, as we mentioned, here in Q2, we saw companies able to push through some of those increases. Not sure if that's going to be the case for the holiday season, but watch for lower inventories and some supply chain disruptions as retailers try to ramp up for that holiday season.

- All right. We're going to leave that there. Chad Oviatt, director of Investment Management at Huntington Private Bank. Thanks so much for joining us today.