The stock market is not off the hook from having to deal with the Fed's goal of slowing growth and inflation. But, there may be an opportunity for some retracing of its recent losses over the next few weeks.
There are several reasons. /1/ Longer-term Treasury yields appear to have stabilized for now. /2/ The April inflation data underscored that the underlying pace is too high, but some of the culprits are likely behind us. /3/ US economic data due over the remainder of May are mostly of minor market significance. Most are expected to show modest gains or declines. /4/ The Russia/Ukraine war is currently background noise from a market perspective. This could change if Russia acts on any of its threats regarding an expansion of NATO. But, some news reports suggest Putin will have a cancer operation soon, which could delay any action on Russia's part. The Ukrainian prediction of victory by year end would be a positive if it happens, but it is too soon to be a catalyst for the market.
An analysis of the 0.6% m/m April Core CPI has mixed implications for bringing inflation down to the Fed's 2% target (about 0.2% m/m).
1. Some of the increase in the Core CPI will probably slow by itself. In particular, the extraordinary 18.6% jump in Airfares should ease up. Fuel prices have flattened out and airline bookings are said to have fallen in response to the high fares. Technically, most of the survey for airfares is bi-monthly, so the April jump may have reflected increases that occurred in March. Airfares in the PPI, which are surveyed monthly, slowed in April. The jump in airfares accounted for about 0.1% point of the 0.6% Core increase.
2. But, some parts of the CPI may be sticky. In particular, Primary and Owners' Equivalent Rent edged up in April. These are measured essentially as the average increase over the prior 6 months, so they risk continuing to move up as past large rent hikes get more fully captured. Moreover, ironically, they could be boosted by a shift away from home ownership because of higher mortgage rates. It's hard to see how Core CPI can move to a 0.2% m/m trend without rent slowing sharply. It's somewhat less of an issue for the Core PCE Deflator, because rent has a smaller weight in its construction.
3. Other components were mixed in terms of speeding up or slowing down from their March paces. The jump in New Vehicle Prices was surprising, given signs that the chip shortage was easing. Companies may be passing on increases in other commodity prices, such as Lithium, as price hikes for electric vehicles have been reported.
4. Commodity prices probably need to fall substantially and wages to slow to get inflation down to the 2% target.
This week's US economic data are expected to be mixed -- more consistent with an economic slowdown than a recession. Consensus looks for a speedup in April Total Retail Sales, but a slowdown in Ex Auto. Both Total and Ex Auto will be boosted by higher prices. So, the most important part will be Ex Auto/Ex Gasoline. Another modest gain would suggest the 0.2% m/m in March was not just a typical offset to a recently strong monthly gain but that the consumer may indeed be slowing down. Consensus looks for a strong 0.5% m/m increase in the April IP Report's Manufacturing Output. But, there is downside risk to this estimate, based on Total Hours Worked. April Housing Starts/Permits as well as the May NY Fed Empire State and Phil Fed Mfg Indexes are expected to slip.
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