In a volatile week, inflation cools, yields rise, equities retreat
Summary
It was another volatile week for markets. U.S. trade policy announcements, retractions, and retaliatory tariffs continue to dominate the headlines, creating market uncertainty. President Trump did not allay investor concerns as he failed to rule out a potential recession in the near-term. Several retailers and airlines warned that the consumer is slowing, which was supported by the preliminary read on consumer sentiment tumbling to 57.9. The 10-year Treasury yield closed the week slightly higher at 4.32%, while the S&P 500 briefly entered correction territory on Thursday.
Inflation
Some welcomed news on inflation emerged last week, with both CPI and PPI coming in below expectations. Headline CPI increased 0.2% month-over-month and 2.8% year-over-year. Core CPI also increased 0.2% month-over-month but remains elevated year-over-year at 3.1%. Headline PPI was unchanged month-over-month and 3.2% year-over-year. PPI excluding food and energy declined 0.1% month-over-month, but also remains elevated at 3.4% year-over-year. While these numbers were cooler than expected, they are still well above the Fed’s target level of 2%. In other words, while there was progress, more is likely needed before the Fed will lower short-term rates, barring a significant deterioration in employment.
Although the CPI and PPI reports were likely well received by the Fed, the University of Michigan Consumer Sentiment survey (preliminary) may signal problems ahead. Consumer sentiment dropping sharply to 57.9 is obviously not a good sign, but the year ahead and 5-year ahead inflation expectations may be more concerning. Chair Powell repeatedly stated that long-term inflation expectations remain anchored, however, the jump in this survey may signal changing expectations. While it is too early to tell if this is a trend or a short-term anomaly, it is worth watching.
Source: University of Michigan
Other key releases and news
There were several other notable economic releases last week. The NFIB Small Business Optimism Index, slightly missed expectations with a reading of 100.7 but remains higher than before the election. However, the Uncertainty Index rose by 4 points, with a reading of 104, the second-highest level on record. JOLTS showed an uptick in available jobs at 7.74M, while jobless claims declined slightly to 220,000 for the week. Finally, the Bank of Canada lowered rates by 25 bps last week, citing that inflation was close to its 2% target and that trade tensions were likely to slow the pace of economic activity.
The week ahead
Investors will have plenty to digest next week with retail sales, housing starts, and the FOMC Meeting.
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