Not-So-Bad CPI?

The stock market should continue to be dominated by developments in the Iran war and corporate earnings this week.  It also will likely focus on inflation data -- April CPI and PPI.  They are expected to be lifted by higher energy prices and tariffs.  However, there is a risk that consensus estimates are too high.  Even if they're not, the market will probably discount high prints as temporary.  A below-consensus print should be viewed positively as keeping the door open for a Fed easing at some point.

Consensus looks for a high April CPI, with Total up 0.6% m/m and Core up 0.4%.  Airfares are likely a major catalyst behind these estimates, reflecting higher fuel costs.  However, there are reasons to think there could be some offsets.  Seasonal factors hold down Airfares substantially this month.  Also, there could be offsets in other CPI components.  Owners' Equivalent Rent could revert to the smaller increases seen in Primary Rent seen since January.  Also, Lodging Away From Home (hotels) could remain modest for a second month in a row, helped by seasonal factors.  And, the impact of tariffs on items like Apparel could ease. 

A lower-than-consensus CPI print would suggest that a moderation in inflation will accompany moderate economic growth ahead.  Friday's April Employment Report supported this outlook.  Although job growth exceeded consensus, the growth was not widespread.  Almost all of the gain was accounted for by only three sectors -- Health Care, Transportation and Warehousing, and Retail.  There also was a sizable increase in part-time jobs for economic reason, according to the Household Survey.  Nevertheless, the Nonfarm Workweek rebounded, helping to lift Total Hours Worked 0.8%(annualized) above the Q126 average.  This q/q increase is in line with the 1.0% (q/q, saar) increase in Q126, when Real GDP Growth was 2.0%.  The steady 4.3% Unemployment Rate also suggests near-trend GDP Growth.  Regarding inflation, the Employment Report shows that wage inflation remains in check.  Average Hourly Earnings rose only 0.2% m/m for the second month in a row.  

This week's releases of real-side US economic data are expected to support the idea of decent growth in Q226.  Both April Retail Sales and Industrial Production are expected to climb.   Although the data appear to be lining up to reflect near-trend growth, the Atlanta Fed model's early estimate of Q226 Real GDP Growth is a strong 3.7% (q/q, saar).  This would require a jump in productivity, given the moderate increase in Total Hours Worked, perhaps AI-related at least to some extent.  Of course, the model's estimate is subject to change as more data come in.  At this point, the risk would seem to be that the estimate will come down.