Monday Update: Inflation Under Control, Trade Balance Stops Improving

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on May 13, 2019 12:45:56 PM

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Monday updateLast week’s data was focused on prices, although we also got an update on the trade balance. This week is a busy one, including looks at retail sales, consumer confidence, and the housing sector.

Last week’s news

The producer price report was released on Thursday. The headline index, which includes energy and food, dropped from a 0.6-percent increase in March to a 0.2-percent increase for April. This drop was slightly more than expected, on a moderation in overall energy prices and with increases in gasoline prices offset by moderation in natural gas prices. The annual rate remained at 2.2 percent, on base effects, which is still reasonably consistent with the Fed’s inflation target. The core index, which excludes energy and food and is a better economic indicator, dropped by even more than expected on a monthly basis; here, it went from 0.3 percent in March to 0.1 percent in April. But the annual rate stayed steady, at 2.4 percent, also on base effects.

Also on Thursday, we saw the international trade report. It showed that the trade deficit went from $49.4 billion for February to $50 billion for March, slightly better than expected. But this is a partial reversal of the improvement seen during the first quarter and may suggest that, as expected, the trade balance will likely not be as additive to growth for the second quarter.

On Friday, the consumer prices report was released. The headline index, which includes energy and food, dropped from a 0.4-percent increase in March to a 0.3-percent increase in April, somewhat lower than expected. This result took the annual rate from 1.9 percent to 2 percent, which is consistent with the Fed’s inflation target. The core index, which excludes energy and food and is a better economic indicator, also came in below expectations. It remained steady at a 0.1-percent increase for both March and April, with an increase in the annual figures from 2 percent to 2.1 percent. Overall, both the producer prices and consumer price data suggest that inflation remains under control.

What to look forward to

The data releases start on Wednesday with the retail sales report. The headline index is expected to show a gain of 0.2 percent for April. This would be reasonably healthy, although down from a rebound gain of 1.6 percent in March due to a decline in auto sales. The core index, which excludes autos and is a better economic indicator, is also expected to moderate, but by less. It should drop from a 1.2-percent gain in March to a still very strong 0.7-percent gain in April. If the numbers come in as expected, it would keep the short-term trend in positive territory. It would also likely signal significantly stronger growth in spending in the second quarter after a weak first quarter.

Also on Wednesday, the industrial production report will be released. It is expected to improve from a small decline of 0.1 percent for March to flat for April, as a drop in utility production from unseasonably warm temperatures was offset by higher oil production and an improvement in manufacturing. Manufacturing is also expected to improve, from flat in March to a gain of 0.1 percent for April. Although the expected rebound would be welcome, it would still leave both reports down over the past couple of months.

For the housing sector, the National Association of Home Builders will release its industry survey on Wednesday. It is expected to rise from 63 in April to 64 for May. This reflects rising confidence in the homebuilding market on improving sales of new homes. On Thursday, the housing starts report is expected to show similar improvement, with an increase from 1.14 million in March to 1.22 million starts for April on an annualized basis. Such an improvement would indicate the housing market is stabilizing after a slowdown. This would be consistent with the rise in affordability and would be a positive economic indicator.

Finally, the University of Michigan consumer confidence survey, released on Friday, is expected to increase slightly from 97.2 in April to 97.8 in May. There may be some downside risk here, as gas prices have risen, and the recent stock market turbulence may weigh on confidence. If the number comes in as expected, this would be well above the historical average and serve as a counterweight to the weaker results from the recent Conference Board surveys.

Have a great week!

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