Core CPI Inflation at 5.5% is mostly unchanged from the beginning of the year, although there are positive signs in producer prices and housing costs. Debt ceiling drama dominates economic news, driving consumer sentiment down again, and the S&P closed lower last week after being momentarily buoyed by the CPI report.
- April CPI inflation was viewed positively by markets, with bond yields falling and equities rallying on the news even though year-over-year core inflation is unchanged over the past three months, and the three-month annualized rate is still running at 5.1%, well above the Fed’s target.
- Moderation in housing inflation continued, and the drop in rent inflation for newly signed contracts suggests those monthly gains will ease further, but not seeing more significant downward pressure on core services ex-housing inflation is problematic since Fed officials are watching this most closely.
- Fed funds futures markets are pricing in a Fed pause in June and July and rate cuts beginning in September. While the pause is consistent with the Fed’s post-FOMC meeting announcement, it is too soon to know when rate cuts might begin, absent a recession.
- Before the June 13-14 FOMC meetings, we will see new inflation and jobs data: April PCE inflation is reported at the end of May, and the May CPI inflation report is on June 13. This week we will see April retail sales, which are looking to be up 0.8% m/m after being down 0.6% in March.
The Consumer Sentiment Index (U of Michigan) fell to its lowest level since November because of the growing uncertainty around the banking industry and frightening predictions about a failure to raise the debt ceiling.
- Concerns over the consequences of a government debt default have driven down both consumer expectations as well as the current conditions index.
- Much of the debt-ceiling concern comes from reporting that doesn’t differentiate between a default on debt payments and needing to delay payments for federal government programs (Social Security) and operations (salaries and facilities). Our one-page circular last Tuesday provides a framework for understanding the differences.
Forward earnings estimates and corporate guidance both are positive. Q1 earnings per share are coming in roughly at +6% y/y, and profit margins are averaging close to 12%.
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