Inflation Risks At Center Stage This Week

Inflation risks will likely be a major focus for the markets as this week progresses.   Rumors or leaks ahead of Trump's May 12th decision regarding the Iran nuclear deal risk roiling oil prices.  And, the April CPI is due Thursday, May 10.  A near-consensus print is likely.  Stocks and Treasuries should rally if some relaxation in Trump's hard stance against Iran is leaked (a negative for oil prices) and the Core CPI prints at or below consensus.  They should sell off if the opposite happens.

This week's key US economic report is the April Core CPI.   Another decline in apparel prices is likely, based on their bi-monthly sampling and further payback for their huge increases in January-February.  But, this may just keep the Core CPI at the consensus 0.2% m/m, as it did in March. 

Recent history shows no significant tendency for the April Core CPI to diverge from the January-February average, barring unusual factors such as the drop in telephone service prices pulled down the Core CPI in both March and April 2017.  The tendency to rise near the January-February pace hints at a high April 2018 Core CPI.  But, the January-February 2018 pace would have been 0.2% m/m without the unusual jumps in apparel prices, which is probably more realistic for comparison purposes.

                               Core CPI (m/m % change)
                      April        March       Jan-Feb Average
 2018              na            0.18            0.27
 2017             0.09        -0.07            0.22
 2016             0.20          0.13           0.22
 2015             0.25          0.26           0.25

Recent history also shows the Core CPI rising over Q2 similarly to how much it rose over Q1.

                             Core CPI (quarterly average of m/m % change)
                                     Q2           Q1
2018                             na            0.24
2017                             0.10         0.17
2016                            0.19          0.19
2015                            0.18          0.16

The macroeconomic background is playing out as I had expected:  The strong data in Q118 are giving back some of their oversized gains, while the weak data are picking up.  Payrolls have slowed in the past two months, after large gains in January-February.  There is still room in terms of payback for a below-trend increase in May Payrolls.  In contrast, early data point to a speedup in Q218 Real GDP Growth.  The NY Fed and Atlanta Fed models' estimates are now 3.0% and 4.0% (q/q, saar) for Q218 Real GDP Growth versus the 2.3% advance print for Q118.  

The 2.3% Q118 Real GDP Growth Rate has been termed weak by many market commentators.   But, this is a misrepresentation.  Growth was above trend (1.8%) in a quarter that tends to be relatively weak.  And, the underlying component -- Nonfarm Business Output -- rose 2.8% (q/q, saar), close to the Administration's 3.0% target and slightly above the 2.7% average of the past two years.  Moreover, I would not be surprised if Q118 Real GDP is revised up as more data come in.