"Early Signs Of A Turn In US Consumer Discretionary," UBS Says

Brent crude futures tumbled below the $80-per-barrel level earlier this morning for the first time since March as traders priced in the U.S.-Iran peace deal and the expected reopening of the Strait of Hormuz maritime chokepoint on Friday. Goldman Sachs and RBC Capital Markets both slashed their fourth-quarter Brent crude forecasts, reinforcing the view that the war-risk premium is rapidly deflating.

If oil has peaked, then inflation pressures may have peaked as well, a positive setup that could provide some tailwinds for consumers this summer through lower fuel costs.

Piper Sandler Chief Global Economist Nancy Lazar told clients, "If inflation has indeed peaked, that will boost real incomes (nominal incomes have been solid), a positive for both real consumer spending and housing, but don't expect robust growth in either."

On Monday, GasBuddy data showed the national average for gasoline slipped below the politically sensitive $4-per-gallon level for the first time in months.

We have outlined in countless notes (read here, here, here, and here) that gas prices above $4 forced consumers to trade down across retailers and, in some cases, to pull back on discretionary purchases altogether.

Pump prices are set to tumble further...

Now that energy prices are moving lower, consumer sentiment is likely to improve. UBS analyst Mark Paski told clients about "early signs of a turn in U.S. consumer discretionary."

Paski explained:

Fairly quiet day across the US consumer, despite the move lower in crude oil and rates following headlines over the weekend.

...

The risk/reward in consumer discretionary is beginning to shift from the doldrums seen as recently as two weeks ago. The SPDR S&P Retail ETF (XRT) versus front-month crude oil (CL1) suggests there is still further upside to the discretionary trade, given crude's move lower this morning. Lower yields should also provide incremental support.

Consumer staples were the second-best performing sector last week (behind materials), and I would expect some residual relief today—particularly within the household and personal care space.

Chart: SPDR S&P Retail ETF (XRT) 

That said, the CPI for energy is on track to slide for June. But consumers are not out of the woods yet. Months of elevated energy prices have already offset the rapidly fading tailwinds from tax cuts. And not to be the bearer of bad news, but one lagged effect of the energy shock could still show up on supermarket shelves later this year. 

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