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Oct 12, 2026Morning Briefing

When American Consumers Are Depressed, They Go Shopping!

Consumer spending may seem to be defying economic gravity—remaining robust in the face of depressed consumer confidence, affordability concerns, and elevated interest rates. Indeed, the saving rate is dropping toward zero and could even turn negative by the end of the decade. Today, Ed and Elias explain why that’s no worry; why consumer spending has been so resilient, like the economy itself this decade; and why they expect the resilience of both to continue. … Also: Inflationary expectations are on the rise. That raises the risk that so are secondary inflationary effects from this year’s inflationary shocks. And that raises the probability that the Fed’s September rate hike won’t be the last this year. … And: Dr Ed reviews “Lioness” (+).

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Oct 11, 2026QuickTakes

S&P 500 SECTORS CALL: More Green On The Screen

Bond yields edged down last week. As a result, the S&P 500 edged up, led by interest-rate-sensitive sectors. The AI-related sectors Industrials (-0.4%) and Information Technology (-0.3%) edged down and in fact were the only down sectors last week. The big interest-rate-sensitive gainers were Consumer Staples (4.0%), Utilities (3.9%), Consumer Discretionary (3.1%), and Financials (2.3%). The year's laggards were last week's leaders (chart). Let's have a look at the Energy, Financials, and Industrials sectors: (1) Energy. S&P 500 Energy (3.6%) powered ahead on renewed risks to ships passing through the Strait of Hormuz (chart). Over the weekend, the Houthis attacked King Khalid International Airport in Riyadh and declared Saudi airspace a zone of military operations, warning airlines, travelers, and airport workers to steer clear of airports across the kingdom. Sector momentum turned decisively positive mid-week, bolstered by a late-week surge as energy equities reacted to escalating Middle East conflicts and subsequent spikes in crude oil benchmarks (chart). Brent crude is quiet tonight at $103.65 per barrel. President Donald Trump helped calm the oil market by announcing that an energy ceasefire between Russia and Ukraine took effect immediately, saying on social media that both parties had agreed to the terms. The rebound in the Energy sector's forward earnings this year has been attributable to the jump in the sector's forward profit margin, fueled by the jump in oil prices (chart). The sector's forward earnings is up 61.7% y/y, and its stock price index is up 53.1% (chart). There should be more upside for the rest of the year, especially if the war in the Middle East heats up after the mid-term elections, as Trump has threatened. Oil & Gas Refining & Marketing has been the sector's big winner so far this year (chart). A global shortage of refinery capacity might fuel more gains. (2) Financials. The Q3-2026 earnings reporting season starts this week with the big banks. The sector's stock price index is nearly down at its 200-day moving average (chart). Solid earnings reports from the banks are likely, as we explained last week. If so, then the sector's uptrend should hold. Rising interest rates are probably boosting the net interest margins of the large banks. However, the rapid ascent in bond yields in recent weeks has unnerved investors, as evidenced by the sharp drop in the sector's forward P/E since mid-August (chart). Bond yields may be stabilizing as investors are drawn to higher returns. The sector's forward earnings is up 17.3% y/y, while its stock price index is up only 4.9% y/y (chart). A solid Q3 earnings season should lift the sector. So far this year, insurance industries have performed best in the sector (chart). (3) Industrials. Industrials balanced competing forces this week—benefiting from safe-haven rotation and robust structural demand, while facing occasional headwinds from surging energy input costs and persistent high-interest-rate pressures. This S&P 500 sector is also testing support at its 200-day moving average (chart). This is another sector where forward earnings is rising faster than the sector's stock price index (chart). The price action sometimes leads the growth rate in forward earnings. This time may be different as the AI buildout continues to boost the sector's earnings. Construction Machinery & Heavy Trucks is the sector's best-performing industry so far this year (chart). Second best has been Rail Transportation. Notwithstanding the wars in the Middle East and between Russia and Ukraine, Aerospace & Defense has been the weakest industry. Military budgets for large munitions and battlefield weapons may have to make room for more spending on AI-guided drones and "Terminators."

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Oct 11, 2026QuickTakes

ECONOMIC WEEK AHEAD: October 12-16

Last week was relatively quiet on the economic data front, but the indicators released pointed to continued economic strength. ADP weekly payroll gains increased for the fifth consecutive week, reaching a three-month high, while jobless claims fell to multi-year lows. The ISM NM-PMI remained solid at 54.9 in September, though its prices paid component jumped to 74.0, the highest since July 2022. Redbook same-store sales rose 8.3% y/y during the week of October 2, signaling continued strength in consumer spending, while the New York Fed's consumer survey showed expected spending growth and one-year-ahead inflation expectations both reaching three-year highs. The data suggest that the Fed has good reason to be hawkish. Accordingly, September's FOMC meeting minutes showed that most policymakers favored another rate hike by year-end, with several judging monetary policy to be barely restrictive, if at all. We agree that further tightening is warranted. However, recent comments by New York Fed President John Williams, Fed Vice Chair Philip Jefferson, and Governor Christopher Waller suggest flexibility on the timing. The markets assign a 17.2% probability to an October hike and a 71.6% probability of a December hike. This week's inflation reports could change those odds. A hotter-than-expected CPI reading on Wednesday could prompt the markets to price in an October hike, pressuring the Fed after September's unanimous 25bps increase, which Fed Chair Kevin Warsh described as removing "a dose of accommodation." An in-line or cooler CPI reading would support patience. Warsh speaks Thursday evening at the IMF and World Bank annual meetings in Bangkok. Here's more: (1) Inflation. The September CPI and PPI reports will be released on Wednesday and Thursday, respectively. The Cleveland Fed’s Inflation Nowcast model projects a hot 0.53% m/m increase in headline CPI, while core CPI is expected to rise a more modest 0.2%. That would put headline and core CPI inflation at 3.6% and 2.4% y/y, respectively. September is expected to mark the 67th consecutive month of CPI inflation exceeding 2.0% y/y, underscoring the persistence of inflationary pressures (chart). Adding to inflation concerns, the averages of the prices-paid and prices-received indexes of five regional Fed banks’ business surveys rose to their highest levels since 2022 in September (chart). Both have historically tracked headline CPI inflation closely. The same indicators have also closely tracked PPI final demand inflation, which was already running hot at 5.4% y/y in August (chart). (2) Monthly Treasury statement. The federal budget deficit totaled $1.77 trillion over the 12 months through August, while outstanding marketable Treasury securities increased by $2.12 trillion over the 12 months through September (chart). The recent slowdown in Treasury borrowing suggests that the deficit may have narrowed somewhat. Tuesday's report will reveal the final budget deficit for fiscal 2026, which ended on September 30. (3) Consumer spending. Thursday's September retail sales report will provide the first official reading on consumer spending for the month. We expect another solid increase, as Redbook same-store sales rose 8.3% y/y in September, well above the 2025 average of 5.8%. Redbook sales historically have tracked official retail sales closely, suggesting that consumer spending maintained strong momentum through the end of Q3 (chart). (4) Manufacturing. The week will also provide important insights into the manufacturing sector, with the October New York and Philadelphia Fed banks’ business surveys due Thursday, followed by September's industrial production and capacity utilization reports on Friday. Manufacturing aggregate weekly hours rose to 84.4 in September, the highest since August 2023, continuing their recent upward trend (chart). Immediate expensing under the OBBBA, reshoring, and the AI buildout are helping to reinvigorate manufacturing activity. With skilled labor in short supply, manufacturers appear to be meeting stronger demand partly by increasing the hours worked by existing employees. The rise in aggregate hours worked suggests that manufacturing production expanded at a healthy pace in September. The New York and Philadelphia Fed manufacturing surveys provide another reason for optimism. Their average manufacturing PMI rose to 22.7 in September, the highest since 2021 (chart). Historically, the average has closely tracked manufacturing production growth, suggesting that factory output could accelerate further in the months ahead.

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