Inflation cooler than expected, yields down

Two key readings over the week painted a better picture regarding inflation than many feared. PPI reported on Tuesday reflected a cooler-than-expected 0.2% on the headline number and 0.0% Ex-Food and Energy. Progress was certainly made on the monthly numbers; however, the year-over-year numbers ticked up to 3.3% on headline and 3.5% Ex-Food and Energy. It was a similar story with Wednesday’s CPI report. Headline CPI came in as expected at 0.4%, ticking up due to the spike in oil prices over the past month. However, CPI Ex-Food and Energy increased 0.2%, lower than expected.

Bessent confirmation hearing

One of the most important developments over the week was the confirmation hearing of President Trump’s nominee for Treasury Secretary, Scott Bessent. The hearing gave investors a better glimpse into Bessent’s economic views, and the market seemed to react favorably. When pressed on the major issues the U.S. faces such as taxes, tariffs, and fiscal policy, Bessent was clear. On taxes, he stated, “If we do not renew and extend these tax cuts we will face an economic calamity.” He further explained that not renewing the tax cuts would have severe consequences on most U.S. workers, not just the highest earners. When asked about tariffs, Bessent said tariffs could be imposed without raising inflation. And finally, when asked about the current fiscal policy, Bessent noted several times that “the U.S. has a spending problem, not a revenue problem.” As the bond market has been worried about the trajectory of the unsustainable U.S. deficit spending as reflected in the recent spike in the 10-year Treasury yield, Bessent seemed to have some calming effect as yields retreated. That said, only time will tell whether the market will continue to believe in the new administration’s economic plan.

Other key economic releases

Other notable economic releases over the week included the NFIB Small Business Optimism Index (105.1, above expectations), the Empire State Manufacturing Index (-12.6, below expectations), the Philadelphia Fed Manufacturing Index (44.3, much better than expectations), jobless claims (217,000, slightly above expectations), retail sales (0.4%, in line with expectations), and housing starts (1.499M, well above expectations).

There were also several international releases, with one of the most notable being China’s better-than-expected GDP reading of 5.4%. The stimulus measures that the government enacted over the past year seem to be working. This is worth watching closely, as a China resurgence would likely drive oil prices higher, which would likely be a headwind for U.S. consumers.

The week ahead

This week is a relatively light week. Notable data includes U.S. leading economic indicators, existing home sales, consumer sentiment, and S&P flash PMIs.