Retailsales,stimuluschequesandpowerofnarratives

US retail sales data which were released on Friday gave a negative surprise. The retail sales which had jumped 9.8% MoM in the month of March showed a 0% increase in April, this was again the expectation of 1%. The primary reason which was touted for the below the expectation number was that the kick which was derived out of the stimulus checks which arrived in March possibly wore off in April. Also, that may be as the economy opens the people will be spending more on experiences (eating out etc) rather than buying things (which gets measured in retail sales).

Anyways, any number or any data point doesn’t matter beyond a point. One can just check that how the important indicators like equity, yields and the Dollar fared post the release. In case they failed to register a blip, markets may be are concerned about something else which will reveal itself only with passage of time. Any data however adds to the narrative and ultimately the plausibility of that narrative allows you to take long term bets. If the narrative here is that people are not spending in absence of a stimulus push, then one can be reasonably sure that the oracles of high inflation are off the mark. Demand for goods get generated when the spender is confident about his or her income prospects. A one-time largesse can alter the buying behaviour temporarily, but a sustained demand cannot be created. This insight (low risk appetite) unrelated to economics is neither new nor original.

Author Yuval Hariri writes in his book The Sapiens about the genetic make-up of the human race or homo sapiens and finds it to be naturally risk adverse owing to a millennia of evolutionary effects. In the great forests in which our forefathers resided, being a risk taker and operating outside the tribe was not a very intelligent exercise. Such risk takers often ended up in the jungle food chain whereas the less adventurous cousin lived longer to concoct narratives and myths and to propagate his genes. This circles back to our earlier point that why we fall for narratives.

The two conflicting narratives which are in vogue currently is that the economy is strong, demand is strong, it doesn’t need support and hence rates should normalize. The other narrative is the economy is improving but still tender, the risks are many the uncertainty is still looming large, we need the evidence on the ground before we remove the life support of liquidity. Any data point essentially feeds onto one of the above two and consequently whips either risk on or risk off. But now comes the point on which the readers should ponder. The narratives in themselves are open to debate but it is important to note that who is championing which narrative. Is the former supported by David and the latter by Goliath (also who qualify as Davids and Goliaths anyway in this story)? Think about the principal actors, central banks, governments, hedge funds, large corporations, individual traders, pension funds, savers etc. It is important to understand that the winning narrative is not context free, it has a higher probability of being a winner if it is championed by a Goliath.

The important data release this week is the FOMC minutes apart from the speeches by few of the Fed Governors. We will analyse the Fed minutes in detail and also debate how the Fed policy of low rates and ample liquidity feeds across the world. The concept of carry trade and its various manifestations will be discussed in detail. On another note during the weekly bond sales last Friday in India, 14000 Cr INR worth of 10-year bonds left unsold. The 10-year bond yield trades shade below 6% currently.