The streak of hotter than expected inflation data that we have witnessed so far this year finally shows signs of letting up, according to April CPI figures released yesterday by the Bureau of Labor Statistics. Specifically, headline CPI came in at 0.3% month-over-month, which was 0.1% lower than expected and the lowest monthly reading since January. The more relevant core CPI, which excludes the volatile food and energy components, also came in at 0.3% month-over-month, which was the lowest monthly reading since last December. Shelter prices, which rose 0.4% month-over-month for the third month in a row, were once again among the largest contributors to the monthly increase, as the much-anticipated decline in rent inflation has been slow to materialize. The April CPI data marks a step in the right direction, but with the three-month annualized pace of core CPI running at 4.1% and higher than the year-over-year pace of 3.6%, more confirmation is needed before we can confidently say that the downward trend in inflation that was in place through the end of last year has resumed.
Inflation let up in April, but more confirmation of downward trend is needed.
Source: CW Advisors, Bureau of Labor Statistics, Bloomberg, as of 5/15/2024
Meanwhile, an additional sign of softening came yesterday from April retail sales figures, released by the US Census Bureau. The so-called retail sales control group, which excludes certain categories such as building materials and office supplies and is considered a more precise method of gauging consumer spending, declined by -0.3% month-over-month, compared to an expected increase of 0.1%. The prior month’s reading was also revised lower from 1.1% to 1.0%. Seven out of 13 categories posted sales decreases in April, led by a pullback at non-store retailers and sporting goods and hobby merchants. The retail sales control group features roughly the same composition as the goods component of the Fed’s preferred measure of inflation, core PCE, and thus bodes well for its next release, which is due at the end of the month.
Retail sales roll over in April after March spike.
Source: CW Advisors, US Census Bureau, Bloomberg, as of 5/15/2024
Following these data releases, financial markets rejoiced, as fears of a resurgence in inflationary pressures were alleviated. Treasury yields dropped (and bonds gained) across the curve, as the market moved to price in two Fed rate cuts in 2024, up from just one only two weeks ago. Stocks rallied, with the S&P 500 index closing at a new all-time high, led by sectors that tend to benefit the most from lower interest rates, such as technology, real estate, healthcare, and utilities. The dollar weakened, boosting the performance of international stocks, both developed and emerging.
We expect yesterday’s data to be just a taste of what is to come over the remainder of the year: a continued gradual slowdown in inflation and a softening of economic growth. As long as the economy doesn’t slow down too much (i.e. doesn’t falls into recession), this should result in an environment that is quite favorable for financial assets and especially stocks, consistent with yesterday’s preview.
Sauro Locatelli CFA, FRM™, SCR™
Director of Quantitative Research
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