Weekly Market Perspectives: CPI beat sparks relief rally

Published: May 20, 2024

Wall Street was upbeat last week after a string of reports showed inflationary pressures largely abated in April. Although the headline figures were still ahead of the Federal Reserve’s long-term target, the reports disrupted the trend of higher-than-expected price increases. Even still, several key service categories remain stubbornly difficult to break and there are few signs the 2% target with be easily achieved. Giving the Fed and markets some additional hope of normalization, retail sales figures came in flat, showing consumers are feeling the pinch of higher prices and higher borrowing costs. Overall, markets held a relief rally with the S&P 500 Index moving higher by 1.6%, and the US Aggregate Bond Index rising 0.6% after rates fell across the curve.

US PPI: Higher-Than-Expected Increase Partly Offset by Downward Revisions
PPI vs PPI Ex-Food and Energy (YoY Change)

Source: Bloomberg, US Census Bureau. As of Apr 30, 2024.

Up first, the Producer Price Index (PPI) on Tuesday showed a surprising headline figure, rising 0.5% in April—well ahead of expectations for 0.3%. The upside surprise was partially offset by more muted components that feed into the Personal Consumption Expenditures (PCE)—the Federal Reserve’s preferred inflation gauge. Markets initially reacted negatively to the report, but ultimately recovered after digesting the details. Most concerning will be services costs which showed a 0.6% increased, the highest since July and accounted for nearly three-fourths of the headline figure.

US Consumer Inflation Downshifts, Sparking Relief Rally
CPI vs CPI Ex-Food and Energy (YoY Change)

Source: Bloomberg, US Census Bureau. As of Apr 30, 2024.

On Wednesday, the Bureau of Labor Statistics reported that Consumer Prices (CPI) rose 0.3%, beating expectations for 0.4%. This was the first month consumer prices came in lower than consensus in 2024, a small change in the right direction for the Fed. Additionally, the so-called core consumer price index—excluding food and energy costs—increased 0.3% in April, also snapping a streak of three above-forecast readings. On an annualized basis, both headline and core figures met consensus expectations of 3.4% and 3.6%, respectively. Core CPI over the past three months increased an annualized 4.1%, the lowest reading since the start of the year, helped by slower shelter price increases.

Areas showing notable gains on the month included apparel (1.2%), transportation services (0.9%), and medical care services (0.4%). Critically, transportation services rose 11.2% over the past 12 months and broader services (excl. energy), a key point for policymakers, increased 5.3% on the year.

Retail Sales Slow: Outlays Little Changed in April Following Downward Revisions
US Retail Sales

Source: Bloomberg, US Census Bureau. As of Apr 30, 2024.

Another report out Wednesday showed no change for retail sales month-over-month, suggesting high borrowing costs and mounting debt are weighing on consumers. Adjusted for inflation, real retail sales fell 0.3%. Sales were pulled lower by declines in online stores (-1.2%), sporting goods (-0.9%), and motor vehicles (-0.8%). Still, retail sales are 3% higher than one year ago and remain supported by a resilient labor market. The Fed will welcome slowing consumption insomuch as it does not cause a broader economic slowdown.

– Written by Eric Schmitz, CFA