Two “Data” items today:
#1: There’s some chatter around that US inflation may have peaked with the March CPI report’s 8.5 percent reading. Fair enough, in that the comparisons to last year get harder over the next few months and that should allow for lower inflation readings. For example, in March 2021 CPI inflation was 2.7 percent versus March 2020. The next three 2021 readings were: 4.2 pct (April), 4.9 pct (May) and 5.3 pct (June). March 2022 had a low hurdle to show high inflation, but the next few months get progressively harder.
You know our approach to such issues: if an observation uses grade school math, then the market already knows it and it is not the source of an investment edge. Inflation might have peaked at 8.5 percent, but the important question is whether it comes down to 6 percent, or 4 percent or 2 percent in the next few years. On that point, 5th grade math is silent.
We prefer to let the market tell us what it’s thinking, and that means going to the inflation breakevens imbedded in Treasury Inflation Protected Securities (TIPS). The chart below shows 5-year and 10-year (blue and red line, respectively) expected inflation as priced by TIPS bonds over the last 5 years. Three brief points:
- The peaks for each were on March 25th, at 2.95 percent (10-year) and 3.59 percent (5-year). Both are not just 5-year highs, but all-time highs back to the introduction of TIPS bonds in 2003.
- Since those highs, TIPS inflation breakevens have come down to 2.80 – 3.25 percent but those are still above the prior highs (2.76 – 3.17 pct) from last November just visible under the inset box in the chart.
- Both readings are well above the Fed’s 2.0 percent target.
Takeaway: the TIPS market accepts that +8 percent US inflation will wane, but it also says that future inflation will remain above the Fed’s 2 percent target for the next 5 and 10 years. The Fed’s ongoing communication program, meant to convince investors that they are serious about reducing inflation, is not working all that well. Markets are either convinced inflation is increasingly structural due to commodity constraints and de-globalization, or they simply doubt the Fed’s commitment to their stated goal. For what it’s worth, we think both are valid concerns.
#2: The most surprising aspect of last week’s US Advanced Retail Sales report was the 6 percent drop in online sales (“nonstore retailers”) from last month. No other category was down anywhere near as much. Motor vehicle and parts dealers, for example, showed a -1.9 percent comp, but that’s due to inventory shortages.
The chart below shows online retail sales as a percent of the industry’s addressable market (everything except car dealerships, gas stations, and bars/restaurants). Three quick points on this:
- Pre-pandemic, online shopping was picking up share at a steady, predictable pace – about 1 percentage point per year. It started 2020 with 21 percent of its market, 3 points higher than 3 years ago.
- At the height of pandemic-related shutdowns in April 2020, online businesses represented 27 percent of all retail sales in categories where they compete.
- Online’s share of its addressable market has been choppy ever since, ranging between 22 and 25 percent. Last month’s 23 percent reading is down from January’s 25 pct and February’s mid-24 pct but is not unusually low.
Takeaway: online retail faces a range of challenges just now, from inventory shortages to US consumers shifting their spending from goods to services. Still, it is holding its own. What’s fascinating to us is that online’s current share of 23 – 24 percent of retail sales is likely where it would have been even without the pandemic reshaping shopping patterns. The industry was growing about 1 percentage point a year pre-pandemic, and it is netting out to 1 point a year since the 2020.