Restaurants flash a warning

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Good morning. Tensions continue to rise in the Middle East. Yesterday, President Donald Trump called for Iran’s “unconditional surrender” (what does that mean in this context?) and US military assets moved closer to the region. The Brent crude price rose 5 per cent. Email us: unhedged@ft.com. 

Restaurants

The May retail sales report was dreary. Sales fell 0.9 per cent from April, with particular weakness in autos and building materials. It’s too early to declare this the start of the tariff-and-poor-sentiment consumer slowdown everyone has been expecting. But it sure isn’t good news. “We think further weakness in spending is likely in the coming months as tariff costs are passed on to consumers,” sighed Samuel Tombs of Pantheon Macroeconomics. Steven Blitz of TS Lombard points out that real growth in discretionary spending, on a rolling six-month basis, peaked back in October.

We’re particularly interested in the sharp fall in spending at restaurants and bars, which we think of as the paradigmatic discretionary spending item (what do we all resolve to do when we want to save money? Eat out less). 

Restaurant sales are a noisy series so, again, we aren’t reading too much into one bad month. But we’ll be watching this area closely. The restaurant stocks in the S&P 500 have been underperforming the wider index for a few months, as Starbucks, McDonald’s and Yum Brands all struggle. 

There is another angle here too, pointed out by Matt Klein over at The Overshoot: inflation. He notes that restaurant prices provided a warning that pandemic reopening inflation would last, that they have never got all the way back to their pre-pandemic trend, and that they are reaccelerating now. His chart (gold star for the title): 

Weak sales and rising prices. Isn’t there a name for that sort of thing?

Oil options

We have nattered on in the past few days about how, while oil prices have been relatively stable in the face of the war in Iran, there were “tail risks” in that market, should the conflict escalate. Michael Chin of the research shop Allocation Strategy wrote to point out that our readers didn’t have to settle for our verbiage. The options markets quantifies how investors see the risk of an oil price jump. Here is his chart of option-implied probabilities (the vertical axis) of Brent crude prices (horizontal axis), from before Israel’s attack began and then on Monday: 

“The mean of the distribution has not shifted dramatically (matching futures prices), but a significant right tail has formed. The probability of a 10 per cent or greater increase is currently at 17 per cent,” Chin writes. That strikes us as probable enough to worry about — and yesterday, the oil price started moving towards that right tail.

Immigration and the economy

Last Friday, after a week of skirmishes between protesters, police and the National Guard in Los Angeles, Donald Trump did what he often does: walk things back. He posted on Truth Social:

Our great Farmers and people in the Hotel and Leisure business have been stating that our very aggressive policy on immigration is taking very good, long time workers away from them, with those jobs being almost impossible to replace. 

Trump’s immigration rules are expected to do particular harm to the agriculture, construction and leisure industries by driving up labour costs. We have anecdotal evidence that undocumented workers are staying home to avoid the authorities. And we know that illegal border crossings have slowed to a trickle: 

But we have not seen the effects in the macroeconomic data. Labour force And major companies in industries likely to be affected by Trump’s immigration policies (including homebuilders Lennar, PulteGroup and Toll Brothers; hotel chains Wyndham Hotels & Resorts and Marriott International; and healthcare companies such as Encompass and Tenet) have not mentioned immigration crackdowns in recent earnings calls. 

Troy Ludtka at SMBC Nikko Securities America says that, in theory, one would see the effects of less migrant inflows in rising construction backlogs or rising construction costs. But both are flat or trending down, not up. Backlog chart from Ludtka:

It could just be a matter of time. According to Wendy Edelberg at the Brookings Institution, the labour market is still seeing the run-on impacts of higher migration from last year. Work permit applications from documented migrants in the US and abroad have soared, and approvals are elevated. Documented migrants may be rushing to get into jobs before the rules change. It’s possible, Edelberg says, that the pick-up in documented workers entering the labour force is outweighing any decrease in undocumented labour:

The US labour force and economy expand to accommodate new entrants; less migration implies slower growth. With less migration, more deportations and a possible break in the wave of work permit applications soon, we could reach a turning point.

(Reiter)

One good read 

Mennonites in Angola.