It was another busy week, with CPI, PPI, and Retail Sales reports released throughout the week. There was a lot of data to unpack, and based on the market’s up-and-down reaction, participants are seemingly still trying to figure out the key takeaway.
CPI was the most significant report of the week, which turned out to be somewhat disappointing. Overall, headline numbers were +3.2% YoY versus a consensus estimate of +3.1%, while Core was up +3.8% compared to a +3.7% expectation.
While one-tenth of one percent will not change the world, the longer-term headline inflation trend has shown little progress over the last nine months. In fact, headline CPI hit its lowest level since 2021 in June last year and has remained stubbornly flat since then.
Moving to Core CPI, despite exceeding the consensus, it still shows steady progress, dropping another one-tenth of one percent YoY from last month. Now at 3.76%, it represents the lowest reading since April 2021. Moreover, as noted before, progress should continue if the shelter component decreases as expected, even if a few other items start increasing.
The last inflation data this week was PPI, which, like CPI, missed to the high side. It came in at +0.6% MoM, double economists’ expectations. While that is shocking on its face, it was only up +1.6% YoY, which leaves it 0.1% lower than the average for the decade before the COVID-19 pandemic—hardly a harbinger of high inflation.
Lastly, the U.S. Census Bureau released the advance estimates of retail sales for February, which were also lower than expected. At +0.6% MoM and +1.5% YoY, the annual number was the third-lowest reading since February 2019 (excluding the COVID-19 period). In addition, the January numbers were revised lower as well, casting some doubt on the strength of the consumer as we head into spring/summer.
So what does all this mean as the Fed meets next week to discuss interest rate policy? The inflation news will likely give the hawkish members a leg to stand on in their quest for “higher for longer.” However, plenty of counterarguments exist as to why inflation could ease further. For example:
- A slowing consumer, as evidenced by retail sales
- Continued easing in the labor market, evidenced by the normalization of average hourly earnings and average weekly hours
- Personal savings rates near all-time lows
- Credit card debt is at $1.13 trillion, and delinquency rates are at the highest levels since 2011
So, while moderating inflation is essential for everyday life and the Fed’s interest rate decisions, it is certainly not the only factor the Federal Reserve Board members will discuss next week. We’ll be keenly tuned in to see what they have to say and what it might mean for markets.
Economy
- Markets were volatile this week due to multiple impactful reports, with the S&P 500 down -0.1%, the Nasdaq down -0.7%, and the small-cap Russell 2000 down -2.1%.
- Retail Sales excluding motor vehicles & parts in the U.S. rose by +0.3% MoM, following a downwardly revised -0.8% drop in the prior month and compared with market estimates of a +0.5% increase.
- The NY Empire State Manufacturing Index sank to -20.9 in March from -2.4 in February, much worse than forecasts of -7.”
- The University of Michigan consumer sentiment for the U.S. edged down to 76.5 in March, the lowest in three months, from 76.9 in February, and below forecasts of 76.9.
Stocks
- U.S. equities were in negative territory. Real Estate and Consumer Discretionary led the decline, while Energy and Materials outperformed. Value stocks led growth stocks, and large caps beat small caps.
- International equities closed lower for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield increased 21 basis points to 4.30% during the week.
- Global bond markets were in negative territory this week.
- High-yield bonds led for the week, followed by corporate bonds and government bonds.
