Tempered Optimism

A cooler-than-expected CPI report this week buoyed investors’ optimism for a nearer term rate cut, with expectations for a September reduction?jumping to over 50%.?While a step in the right direction, the headline improvement was a minimal one tenth of a percentage point drop, still leaving consumer price pressures well above 3%. In other words, many more steps are still needed to offer the needed confidence that inflation is on a sustainable downward trajectory back to 2% or?justification?for an adjustment to the current level of policy.?

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Urging caution among market participants, a number of Fed speakers took to the stage this week with an ongoing message of calm and temperance.

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Speaking in the aftermath of?the April CPI release, New York Fed President John Williams noted there is no evidence yet in his mind pressing for a reduction in rates.?“I don’t see any indicators,” he said, suggesting there’s a reason to change the stance of monetary policy now.?

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Echoing a higher-for-longer scenario, Dallas Fed President Lorie Logan also chimed in noting, “It’s just too early to think about cutting rates” given disappointing inflation data so far this year.

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Chairman Powell himself also reiterated the Fed’s ongoing message of patience as the latest inflation data continue to show a “lack of further progress.” “We did not expect this to be a smooth road,” he said, but the inflation data is “higher than I think anybody expected.”

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As such, Fed Governor Michelle Bowman has insisted it is unlikely conditions will warrant a rate cut in 2024. Bowman’s base case, which is in line with our own, shows the Fed on hold throughout the entirety of the year, or at least until inflation again begins its pathway of descent. “I, at this point, have not written in any cuts” for 2024, Bowman said during an interview with Bloomberg News. “I’ve sort of had an even expectation of staying where we are for longer. And that continues to be my base case.”

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On deck today, at 10:15 a.m. ET, Fed Governor Christopher Waller will speak on payments innovation, and technical standards. Later today at 12: 15 p.m. ET, San Francisco Fed President Mary Daly will give a commencement address at the University of San Francisco School of Management.

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Yesterday, housing starts rose 5.7% in April, pulling the annual pace up from 1.29M to 1.36M, a two-month high. Starts were expected to rise 7.5%, according to the median forecast on Bloomberg. Single family starts declined 0.4%, while multi-family starts jumped 30.6%. Year-over-year, housing starts fell 0.6% in April following a 4.1% annual drop in March.

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Building permits, on the other hand, unexpectedly fell 3.0% in April, pulling the annual pace down from 1.49M to 1.44M, the lowest since December 2022. Building permits were expected to increase 0.9% at the start of Q2, according to Bloomberg. Single family permits fell 0.8% and multi-family permits dropped 7.4% in April. Year-over-year, building permits fell 2.0% in April, the third consecutive annual decline.

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Also yesterday, initial jobless claims fell 10k to 222k in the week ending May 11, a two-week low. The four-week average, however, ticked higher from 215k to 218k. Continuing claims, or the total number of Americans claiming ongoing unemployment, rose from 1.78M to 1.79M in the week ending May 4.

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In addition, the Philly Fed Business Outlook Index dropped from 15.5 to a reading of 4.5 in May, a two-month low. In the details of the report, prices paid declined from 23.0 to 18.7, a two-month low and averaging 16.3 over the past six months, while prices received moved up 1.1 points to a reading of 6.6, a five-month high. Also, the number of employees inched higher from -10.7 to -7.9 in May, albeit still marking the seventh consecutive month in negative territory, and new orders dropped from 12.2 to -7.9 in May, the lowest reading in four months.

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Additionally yesterday, import prices rose 0.9% in April, surpassing the 0.3% increase expected and marking the largest monthly gain since March 2022. Export prices, meanwhile, rose 0.5% in April, a two-month high and surpassing the 0.2% gain expected. Over the past 12 months, import prices rose 1.1%, while export prices declined 1.0% at the start of Q2.

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Finally yesterday, industrial production was flat (0.0%) in April, falling short of the 0.1% gain expected and a three-month low. Meanwhile, capacity utilization inched lower from 78.5% to 78.4% in April, as expected.

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This morning, the Leading Index is expected to decline 0.3% in April following a similar fall in March.

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Next week, the economic calendar begins on Wednesday with weekly mortgage applications, along with April existing home sales. Last month, existing home sales fell 4.3% in March to a 4.2M unit pace, a two-month low. Year-over-year, existing home sales fell 4.3% in March, the largest annual drop since September and marking the 32nd consecutive month of decline. This month, existing home sales are expected to extend that decline, dropping 0.7% in April to a 4.16M unit pace, potentially declining 1.4% year-over-year.?

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Later in the week on Thursday, weekly jobless claims, along with more housing data – the new home sales report for April – will be released. New home sales jumped 8.8% in March from 637k to 693k, the highest level since September. Over the past 12 months, new sales increased 8.3%, the strongest annual gain in five months. This month, however, new home sales are expected to decline 1.9% in April to a 680k unit pace. Over the past 12 months, new home sales are potentially expected to rise 0.1%.

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Also on Thursday, the preliminary S&P Global reports for manufacturing, services and the composite PMIs, along with the Chicago Fed National Activity Index for April, and the Kansas City Fed Manufacturing Activity Index for May.

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Wrapping up the week, on Friday, the April durable goods orders report. This month, durable goods orders are expected to fall 0.8% in April. Excluding transportation, however, orders are expected to increase 0.1%.

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Additionally on Friday, the final May reading of consumer sentiment from the University of Michigan is likely to be little changed from a 67.4 headline read in the preliminary report.

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Finally, on the heels of the latest – uneven – inflation reports this week, next week there are a number of Fed officials slated to take the stage yet again including Atlanta’s Bostic, Governor Barr, Richmond Fed President Thomas Barkin, and New York’s John Williams.

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Additionally from the Fed, on Wednesday, the May 1 FOMC meeting minutes will be released. While the Fed remains focused on eventual rate cuts, investors will be looking for any indications of a consideration of a less favorable scenario. Is the Fed even considering the possibility of inflation remaining elevated or worse pushing higher still? At what point is the Fed willing to not just delay rate cuts, but potentially consider reengaging with additional rate hikes?

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-Lindsey Piegza, Ph.D., Chief Economist