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Thought of the day

US producer prices in April rose more than projected, up 0.5% month-over-month. Compared with a year ago, the PPI rose by 2.2%, the most since April 2023.

However, the monthly increase was largely driven by a downward revision in the March data, to a fall of 0.1%. In addition, several categories in the PPI report that are used to calculate the Federal Reserve’s preferred inflation measure—the personal consumption expenditures (PCE) price index—eased, including the cost of hospital outpatient care and airfares. This helped investor sentiment ahead of today’s release of April’s consumer price index (CPI), with the S&P 500 up 0.5% and the yield on the 10-year US Treasury down 4 basis points to 4.44% on Tuesday.

The April PCE report will only be published at the end of this month, and investors remain focused on today’s CPI. Fed Chair Jerome Powell on Tuesday said the US central bank must be patient and wait for evidence that inflation continues to cool, but recent economic data underpin our view that the Fed should be in a position to start policy easing later this year, most likely in September.

The disinflation trend should return in the coming months. While services costs in the PPI report climbed by the most since July, we think details of the index are overall positive for core PCE later this month. We also expect to see a renewed fall in consumer inflation, as data on new leases point to softer shelter inflation. In addition, the Fed’s latest Beige Book suggested greater consumer resistance to price hikes, while fewer businesses plan to raise prices, according to the National Federation of Independent Business’s (NFIB) Small Business Optimism Index. With a historically low savings rate in the US, we believe strong consumption cannot continue indefinitely.

The labor market has continued to show signs of softening. The increase in the latest weekly initial jobless claims has added to evidence that demand for workers is moderating. This came after a cooler-than-expected labor report for April, which showed a smaller-than-expected increase in employment growth, a higher unemployment rate, and wage growth that is at its lowest since June 2021. The latest Jobs Opening and Labor Turnover Survey (JOLTS) also pointed to fewer job openings and a lower quit rate than before the pandemic began. Fed Chair Jerome Powell has indicated the labor market has become more balanced, and we believe any weakness in the labor market would be a catalyst for faster Fed cuts.

US economic growth appears to be moderating. In addition to the noticeable slowdown in the first-quarter GDP growth to a two-year low of 1.6% year-over-year, the ISM services PMI for April dropped into contraction territory for the first time since December 2022. Last week, the University of Michigan survey showed US consumers have become less confident in a strengthening US economy, with the headline figure for May falling to the lowest level since November. The NFIB survey also showed persistent pessimism among small business owners. Today’s release of retail sales for April should give us another glimpse of the strength of the US economy, as we maintain our view for a soft landing.

So, we view Powell’s remarks yesterday on more patience as largely a reiteration of a data-dependent Fed, and believe that more favorable data ahead should see the central bank cut rates by 50 basis points this year. This creates a supportive backdrop for quality bonds and quality stocks.