Mixed US Inflation, Consumer Cracking
The highlight for markets this week was the US inflation data, kicking off with the Producer Price Index (PPI) figures on Tuesday, which exceeded expectations in April. The PPI final demand rose 0.5% month-over-month (mom) last month, following a previously revised 0.1% fall. Year-over-year (yoy), PPI climbed 2.2%, in line with expectations, reaching the highest level since April 2023. However, the previous reading was revised downward from 2.1% to 1.8%.
The core figures, excluding food and energy, surprised on the upside, rising 0.5% mom and 2.4% yoy. Nevertheless, both core readings received downward revisions for March, with the mom figure revised to -0.1% (from +0.2%) and the yoy figure revised to 2.1% (from 2.4%). Revisions to components that make up the core Personal Consumption Expenditures (PCE) price index, the Federal Reserve's key inflation measure, indicate it may not have risen as sharply in the first three months of the year as initially estimated. Following the release, Fed Chair Powell described the PPI prints as "quite mixed." Other Fed chatter focused on the “higher for longer” messaging, warning against rushing to change their policy stance prematurely.
Next, the Consumer Price Index (CPI) readings moderated in April, with the core prints below market expectations. The headline figure rose 0.3% mom (vs. expected 0.4%) and 3.4% yoy (prev. 3.5%), while the core readings, excluding food and energy, eased to 0.3% mom (prev. 0.4%) and 3.4% (prev. 3.8%). Thus, disinflation is back in play, although not as sharply as the Fed may have hoped. Markets reacted positively, with U.S. Treasury yields falling and the S&P 500 Index soaring to new all-time highs.
The disappointing retail sales figures supported some of these moves, particularly given the downward revisions for March's readings, indicating cracks in US consumer resilience. The control group figure, used to calculate GDP, missed expectations for a 0.1% rise in April, falling 0.3%. Ahead of the data, Home Depot reported subdued results, with its managing director noting "some hesitation among consumers" and attributing the "current challenges to a period of churn in the consumer economy."
Further insights into consumer spending will be provided today when Walmart, a bellwether for consumer spending, reports its Q1 earnings. Earlier this week, the retail giant announced plans to lay off and relocate hundreds of its corporate employees.
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