?The latest consumer price data dominated the economic discourse, reflecting heightened anticipation for Federal Reserve easing. March's Consumer Price Index (CPI) witnessed a 0.4% increase at both headline and core levels, fueled by a 4.5% three-month annualized rate for core CPI. Although core goods deflation was observed, stubborn core services inflation persisted, notably in medical services and motor vehicle insurance. Despite the slow descent in shelter costs, primary shelter inflation rose by 0.4% in March. These inflationary pressures underscored the challenges faced by small business owners, with rising costs and dwindling sales expectations driving sentiment to its lowest level since 2012.
- Inflationary Pressures Persist: The acceleration in core CPI during the first quarter likely reflects the sporadic nature of monthly price movements rather than a reversal of slowing inflation. Elevated inflation remains a concern for consumers, with year-ahead and long-term inflation expectations reaching 3.1% and 3.0% in early April. Despite efforts to mitigate input price pressures, the Producer Price Index (PPI) showed only modest improvement, suggesting continued challenges in reducing inflationary trends.
- ?Fed Easing Outlook: The latest data alter expectations for Fed easing, with projections revised to a 25 bps rate cut at the September policy meeting and subsequent cuts at every other meeting through next year. This nuanced approach indicates a cautious stance by the Fed, with the target range for the fed funds rate expected to reach 3.75%-4.00% by year-end 2025.
- Retail Sales: February's personal spending uptick was accompanied by a shift towards services, dampening retail sales growth. Despite a decline in the retail "control group," consumer outlays remained resilient, buoyed by solid wage growth and above-pre-pandemic trends in credit card spending. However, softening vehicle sales and rising gasoline prices may impact March's retail sales figures.
- Industrial Production: The factory sector showed signs of revival in February, as core capital goods orders increased by 0.7%. The ISM manufacturing index's return to expansionary territory further bolstered sentiment, with average hours worked in the manufacturing sector rising. However, caution prevails amidst uncertainties surrounding monetary policy adjustments.
- Existing Home Sales: February saw a significant uptick in existing home sales, driven by improved supply and favorable mortgage rates. Although inventory levels increased, a subsequent rise in mortgage rates dampened demand, with March sales projected to decline as a result.
- Inflationary pressures persist, influencing consumer sentiment and shaping expectations for Fed easing.
- Resilient consumer spending contrasts with softening retail sales and mixed signals from the manufacturing and housing sectors.
