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Monday Update: Inflation Under Control, Fed on Hold

Written by Brad McMillan, CFA®, CFP® | Apr 15, 2019 7:00:53 PM

Last week was a busy one for economic news, with detailed looks at inflation, some color on the Fed’s take on interest rates, and a consumer confidence update. This week, we’ll see data on housing and retail sales.

Last week’s news

On Wednesday, the consumer prices report was released. The headline index, which includes energy and food, rose by more than expected; it went from a 0.2-percent increase in February to a 0.4-percent increase for March on a rebound in energy prices. This result takes the annual rate from 1.5 percent to 1.9 percent, which is still below the Fed’s inflation target. The increase was entirely due to gasoline prices and will likely moderate as those prices stabilize. The core index, which excludes energy and food and is a better economic indicator, stayed low at 0.1 percent for both February and March. On an annual basis, it edged down from 2.1 percent to 2 percent, a 13-month low. Overall, these figures show that inflation remains under control.

Also on Wednesday, we got some insight into the Fed’s decision last month to leave rates unchanged as the minutes from the Fed’s March meeting were released. Although the committee’s economic expectations remained healthy for the most part here in the U.S., increased worries about the global economy were apparent, as well as the conclusion that inflation remained under control. The notes showed that Fed members are unlikely to raise rates this year, in line with expectations, but included little color on how they plan to stop reducing the Fed balance sheet. Overall, the notes reinforced market expectations of a steady rate policy.

The producer price report was released on Thursday. The headline number rose from 0.1 percent to 0.6 percent, well above expectations but again due to energy. Here, the annual rate rose from 1.9 percent to 2.2 percent. The core index, excluding food and energy, also rose by more than expected. It went from a 0.1-percent increase in February to a 0.3-percent increase in March, above expectations. But the annual rate dropped from 2.5 percent to 2.4 percent on base effects. These numbers are largely consistent with the consumer prices report and have the same meaning.

Finally, the University of Michigan consumer confidence survey, released on Friday, came in below expectations. It dropped from 98.4 in March to 96.9 in April. The decline was driven by lower future expectations and occurred despite the recent rise in the stock market and rebound in job growth. Although the number remains relatively high on a historical basis, the trend appears to have shifted to negative, which is also confirmed by the recent weaker results from the Conference Board surveys. This drop could signal slower consumer spending growth going forward.

What to look forward to

On Tuesday, we’ll see the industrial production report. It is expected to rebound from flat in February to a gain of 0.3 percent for March, largely on gains in utility production and possibly in oil production, as well as on higher prices. Manufacturing is also expected to improve, from a decline of 0.4 percent in February to a gain of 0.2 percent for March. Here, there is some downside risk on declines in hours worked in the sector. Although the expected rebound would be welcome, it would still leave both reports down over the past couple of months.

Also on Tuesday, the National Association of Home Builders industry survey will be released. It is expected to rise from 62 in March to 64 for April, reflecting rising confidence in the homebuilding market. With interest rates declining, affordability has improved, which would make such an improvement reasonable.

On Wednesday, the international trade report is expected to show the trade deficit worsening slightly, going from $51.1 billion in January (which was a sharp drop over December) to $53.6 billion for February. Despite the small move, this result would still be better than recent figures. Further, it would help first-quarter growth, or at least act as less of a headwind than expected.

On Thursday, the retail sales report will be released. The headline index is expected to rise sharply, from a 0.2-percent decline for February to a 0.8-percent gain for March, on a rebound in auto sales and higher gasoline prices. The core index, which excludes autos, is also expected to bounce, from a 0.4-percent drop in February to a 0.7-percent gain in March. If the numbers come in as expected, it would take the short-term trend back into positive territory but would still be weak by recent standards. Even with the rebound, the data suggests we may well see slower growth in the first quarter.

Finally, on Friday, the housing starts report is expected to show improvement, with an increase from 1.16 million in February to 1.23 million for March on an annualized basis. Such an improvement would indicate the housing market is stabilizing after a slowdown, which again would be consistent with the rise in affordability and be a positive economic indicator.

Have a great week!