Last week inflation news was encouraging but not sufficiently positive to keep the Fed from tightening another 25 bp at its May 2-3 meetings. Another rate boost, coupled with slowing growth and negative first quarter earnings, will put downward pressure on stock prices.
- Headline CPI inflation fell to a near two-year low of 5% (y/y) in March from 6% in February, but core inflation increased to 5.6% (y/y) from 5.5% in February.
- The University of Michigan Consumer Sentiment report last Friday showed that the 12-month ahead measure of inflation expectations rose sharply to 4.6% from 3.6% a month earlier, creating concern, especially at the Fed, that inflation expectations may be settling in.
- There is good news in shelter inflation slowing, with lower rent inflation and owner equivalent rents rising more modestly. This slowing is expected to reduce core inflation by as much as 1% by year-end.
- The other good inflation news reported last week is that core producer price inflation declined 0.1% (m/m) in March because of lower trade services prices.
Additional new data reported last week indicate further slowing of the economy heading into the second quarter.
- Retail sales fell 1% m/m in March, and manufacturing dropped 0.5% m/m. The manufacturing decline also suggests that the reopening of China is providing no significant benefit to U.S. producers.
- Small businesses (NFIB) reported last week a sharp worsening in credit availability in March, with NFIB’s credit index falling to its worst in level in 10 years coincident with NFIB’s capital expenditures intentions slipping to a two-year low and hiring intentions dropping to a three-year low.
- The consensus in fixed-income markets is for a likely recession beginning in Q2 or Q3, leading to Fed rate cuts in Q3 and Q4.
In contrast to S&P prices being up two consecutive quarters through the end of March 2023, S&P earnings are looking to be down a second consecutive quarter in 2023-Q1.
- Bloomberg consensus projection is for an 8% y/y drop in Q1 S&P earnings per share and a 4% y/y drop in Q2 earnings per share.
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