Equity markets started the week with thin trading volumes following the Easter weekend holiday. However, the major equity indices finished the week higher, as economic data suggests inflationary pressures are slowing. Leadership in the S&P 500 shifted to the materials and industrial sectors in the week, and in Canada, mining and energy posted gains. Oil advanced 2.4%, and precious metals posted solid gains. European equities also posted substantial gains during the week as recession fears receded.
On Wednesday, the Bureau of Labor Statistics reported the headline Consumer Price Index for all items rose an additional 0.1% after a 0.4% increase in February. Year-to-date, the all-items index rose by 5%. The core CPI, excluding the volatility of food and energy, rose 0.4%, and annually is up 5.6%. Energy prices fell 3.5%, food was flat and shelter gained 0.6% – one of the smallest gains since November. Annually, shelter inflation is up 8.2%. The inflation data is well above the Fed target but shows signs of moderation. The CPI for March does not reflect the most recent price increase in oil prices. If oil prices remain elevated, we expect inflation to accelerate in the coming months.1
On Thursday, the Department of Labor Statistics released the Producer Price Index (PPI) for March. The March PPI for final demand declined by 0.5% in March, bringing the final demand for the year ending March to 2.7% compared to the last year, which ended February at 4.9%. The wholesale cost of goods dropped 1% last month – declining for the second month in a row, largely because of lower gas prices. Wholesale food prices increased by 0.6%, reversing the three-month trend of lower prices, and the cost of services slid by 0.3%. The core PPI, excluding food and energy, rose by 0.1% last month, and it slowed to 3.6% from 4.5% the previous year .2
Also, on Thursday, for the week ending April 8, the initial unemployment claims showed an increase of 11,000 from the previous week to 239,000. For the previous week, ending March 28, claims for all benefit programs decreased by 33,416 to 1,706,658.3
On Friday, another sign of a slowing U.S. economy and a shift in consumer spending habits was evident in that the U.S. Census Bureau reported estimates for U.S. retail sales and food service for March fell 1%. The February revised data showed a decrease of 0.2%. Retail trade sales were down, and non-store retailers were up, as were food services and bars. Gas station sales declined 5.5% from lower oil prices, and new cars and parts sales fell 1.6%.
Restaurants rose 0.1% after a dismal February decline of 1.6%.4 The Federal Reserve reported on Friday that U.S. industrial production increased 0.4% in March. A rise in utility output, due to cold weather, enhanced the increase. Manufacturing fell 0.5% after gaining 0.6% in February, bringing the first quarter total to a tepid 0.3%. Mining output fell 0.5% in March, and auto output fell 1.5%. Excluding auto, industrial output was up 0.5% in March. On a positive note, capacity utilization rose to 79.8% from 79.6% in February compared to 80.5% last year.5 Finally, on Friday, the University of Michigan Consumer Survey revealed that sentiment rose slightly to 63.5 in April from 62 in March. The big surprise was that consumers expect prices to increase 4.6% over the next year – up from a 3.6% estimate last month. The long-run inflation expectation remains steady at 2.9%. The Survey of Current Economic Conditions increased by 2.3 points to 68.6, and the Index of Consumer Expectations rose 1.1 points to 60.3.6
The question still remains – will the Fed raise the rate at the next meeting or pause? Until we have real rates of return on bonds, we believe it is unlikely that the Fed will pause or reserve course unless there is a catastrophic, exogenous event that will cause the Fed to inject liquidity into the system. Over the last several years, the Fed has done much to prevent a long-term recessionary cleansing necessary for healthy, sustainable economic growth. The next several years will likely be challenging to navigate as a result.
Sources:
1https://www.bls.gov/news.release/cpi.nr0.htm
2https://www.bls.gov/news.release/pdf/ppi.pdf
3https://www.dol.gov/ui/data.pdf
4https://www.census.gov/retail/marts/www/marts_current.pdf
5https://www.federalreserve.gov/releases/g17/current/default.htm
6http://www.sca.isr.umich.edu/
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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