Morning Market Brief: May 16, 2024

US inflationary pressures softened modestly?

The US Bureau of Labor Statistics reported that the annual inflation rate in the US dropped in April. This marked the first decline in inflation in 2024, raising hopes that higher interest rates will help bring inflation back to the US Federal Reserve Board’s (Fed) 2% target. US inflation remains elevated, which has raised expectations the Fed might not be in a position to begin lowering rates in the near term.?

• The annual inflation rate in the US was 3.4% in April, down from the 3.5% rate in March. A Bloomberg survey showed economists expecting the 3.4% rate in April. The annual core inflation rate, which excludes more volatile items, fell to 3.6% in April from 3.8% in March.
• Prices for shelter moderated over the month, while prices for new and used vehicles declined. On the other hand, energy prices rose on a year-over-year basis. Gasoline prices rose at an annual pace of 1.1%.
• The US also released its retail sales report for April yesterday. Data showed retail sales stalled in April, posting no growth (0.0%). This marked the first time in three months retail sales have not moved higher. However, March’s sales were revised downward to 0.6% from the initial reading of 0.7%. High borrowing costs and still elevated inflation appear to be hindering consumer activity.
• While lower demand could help bring inflation down further, it has the potential to negatively impact overall economic growth. US economic growth has slowed in recent quarters, with consumer spending easing amid tight financial conditions.

The Fed makes its next interest-rate announcement on June 12. Economic data combined with recent comments from Fed officials show a rate cut at this meeting is unlikely with the Fed having more work to do to bring inflation back to its target. Meanwhile, it appears likely the Bank of Canada will diverge from the Fed and begin cutting rates as early as this summer.

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