5/17/24 - Inflation Focus: PPI and CPI Analysis, Retail Sales Dip, Housing Market Challenges

Inflation data was the market’s focus this week after a string of hotter than expected data points so far this year. On Tuesday, the Producer Price Index (PPI) came in above expectations for April, with the core measure excluding food and energy rising 0.5% month-on-month and 2.4% year-on-year. However, several PPI components that feed into the Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditure (PCE) Deflator, decelerated. In addition, the prior month’s PPI was revised lower from 0.2% month-on-month to -0.1% which also helped market sentiment.

Consumer Price Index (CPI) data for April came in line with expectations on Wednesday at the headline level. CPI rose 0.3% month-on-month and 3.4% year-on-year, while the core measure came in at 0.3% and 3.6% respectively. Encouragingly, the shelter component which makes up a large proportion of the CPI (and to a lesser extent, PCE) but lags real time rents continues to disinflate. The services component excluding shelter, which has remained stubbornly high, also decelerated from the prior months’ levels.

Elsewhere, retail sales data came in below expectations this week supporting a growing narrative that consumption is finally moderating. April retail sales were unchanged month-on-month but excluding more volatile components like gas, building materials and autos fell by 0.3%. Anecdotal reports from large retailers this week as they report earnings results also suggest consumers pulling back on spending and trading down.

Housing data fell short of expectations reflecting elevated mortgage rates which continue to constrain buyer demand. Housing starts rose 5.7% year-on-year to 1.36 million units on an annualized basis, but are still hovering near their post-pandemic lows and down from over 1.8 million units at the peak. Building permits which lead housing starts fell to their lowest level since December 2022.

Bond yields moved lower this week as a result of better-than-expected underlying inflation data and weaker retail sales. At the time of writing the 2-year US Treasury declined around 7 basis points to 4.80% and 10-year by 10 basis points to 4.40%. The market expects the Fed to start lowering interest rates by September, a view which we continue to subscribe to. The minutes for the last Fed meeting are released next week, which may provide more insight into the timing of their move.

Next Week:

Existing Home Sales, FOMC Meeting Minutes, Chicago Fed National Activity Index, Jobless Claims, S&P Global PMIs, New Home Sales, Durable Goods Orders, University of Michigan Survey.

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