Monday Update: Inflation Pulls Back

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on May 14, 2018 1:46:36 PM

and tagged In the News

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MarketOutlook_1Last week was largely focused on prices, although we got a look at consumer confidence. This week, we’ll be watching the economic data to see whether earlier signs of a slowdown are passing.

Last week’s news

On Wednesday, the producer prices report showed price growth moderated from 0.3 percent in March to 0.1 percent in April, which was below expectations of 0.2 percent. On an annual basis, the Producer Price Index headline growth dropped from 3 percent in March to 2.6 percent in April. This result was below the expected 2.8 percent.

Core producer prices, excluding food and energy, also declined. Price growth went from 0.3 percent in March to 0.2 percent in April, in line with expectations. The annual figure moderated, from 2.7 percent to 2.3 percent, which was slightly below expectations of 2.4 percent.

On a year-on-year basis, producer inflation, although down this month, remains close to the highest levels since 2012. So, even as inflation growth may be subsiding, it still remains above the Fed’s target of 2 percent—suggesting that rates will continue to rise.

On the other hand, the consumer prices report, released on Thursday, showed inflation at the consumer level was rising. The headline index rose from a decline of 0.1 percent in March to a gain of 0.2 percent in April, below expectations of 0.3-percent growth. This result took the annual figure up from 2.4 percent to 2.5 percent (a 14-month high), primarily on rising energy prices.

Core prices, which exclude food and energy, showed slightly slower growth, declining from 0.2 percent for March to 0.1 percent in April. Although this was below expectations of 0.2 percent, due to base effects, the annual figure stayed constant at 2.1 percent for both March and April. Again, this is somewhat slower than expected but still above the Fed’s target, suggesting rates will keep rising.

Finally, on Friday, the University of Michigan consumer confidence survey did better than expected. It remained steady at 98.8 for May, the same as in April. This survey remains at a high level, consistent with continued growth. It also suggests that consumption growth is likely to rebound after a slow first quarter, which would be constructive for the economy.

What to look forward to

Tuesday’s retail sales report may moderate somewhat at the headline level. Growth is expected to tick down from an extremely strong 0.6 percent in March to a still healthy 0.4 percent in April. There may be some downside risk here, as auto sales declined last month. A rise in gas prices should offset that, however, so any damage is likely to be limited. Core retail sales, which exclude autos, are expected to accelerate from 0.2-percent growth in March to 0.5-percent growth in April. Here, the rise in gas prices could improve this result. If growth remains strong, it will suggest that last month’s positive results are sustainable and that consumption growth is likely to exceed weak first-quarter levels going forward.

Housing is the next area where a rebound is expected. The National Association of Home Builders survey, released on Tuesday, is expected to rebound from 69 in April to 70 in May. Meanwhile, the housing starts report is expected to remain steady at 1.32 million in April, the same as in March. A drop in building permits and elevated lumber prices could weigh on this result.

Finally, on Wednesday, we’ll see the industrial production report. It is expected to show an acceleration in the headline index from 0.5-percent growth in March to 0.6-percent growth in April, driven by gains in manufacturing output. In fact, manufacturing is expected to bounce back, rising from 0.1-percent growth in March to 0.8-percent growth in April, due to strong growth in hours worked. This would also be a rebound from a weak first quarter and suggest faster growth ahead.

Have a great week!

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