Financial markets remained stable last week amid the lack of any significant economic developments.
The Week That Was
The most reliable short-term inflation measure is the core consumer price index (CPI), which remained at 5½ percent over the past year. Headlines to the contrary are misleading and refer to other, less-reliable measurements.
In the latest six months the core CPI inflation rate remained slightly below 5 percent. However, it has moved back above 5 percent in the past three months. This suggests progress on reducing inflation has stalled.
April producer prices, which tend to lead inflation, show a pattern similar to consumer prices. Core producer prices declined to 3 percent on a year-over-year basis, which is good news. However, over the past four months, the six-month rate of change has been slightly above 4 percent. As with the core CPI, progress on further reducing producer prices has stalled.
Weekly seasonally adjusted unemployment data are beginning to show tentative signs of job layoffs.
Unemployment claims for the week ending May 6 reached 264,000, the highest since October 30, 2022. The four-week average, at 250,000, hit its highest level since November 20, 2022.
However, actual claims without seasonal adjustment are lower than at the beginning of the year. Hence, the reported rise in unemployment claims data may simply be the result of a faulty seasonal adjustment.
Things to Come
All of the significant economic news for this week is due tomorrow.
April retail sales information should help clear up some confusion over the direction of the economy. First-quarter retail sales rose at a 5 percent annual rate, similar to the overall GDP. Retail sales in March fell by 1 percent, so the extent of the April rebound will provide some insight to the extent of any weakness this quarter.
We expect April retail sales to be up 1 percent or more. Anything less would signal serious weakness in the retail spending.
Also on Tuesday, the Fed’s index of manufacturing is expected to be close to 100, where it has been since the beginning of 2022.
May’s Homebuilders’ Index will provide the most up-to-date information on new home activity. The Index has recovered to 45 (50 represents break-even) from a depressed level of 31 in December. We expect the index to remain near 45, indicating a relatively modest decline in activity.
Money, Money, Money
The current yield on 10-year Treasury Notes remaining near 3½ percent is a key indicator financial markets are confident the Fed will reach its inflation objective.
Market Forces
The S&P500 has been remarkably stable since early April, moving only slightly above or below 4,100. The range for this year has been limited, from 3,900 to 4,200. Stocks appear to be oblivious to concerns an inability to resolve the debt ceiling will shut down the government.
The market’s lack of concern is understandable. Interest on the debt will be paid. Yellen will not say it, but there is more than enough revenue each month to pay for interest on the debt, Social Security, Medicare, Medicaid, and defense and still have 13 percent left for other items.
Much of federal spending is destructive. This is particularly the case with the president’s various “Build Back Better” bills. During the last two years these bills added $500 billion a year to a federal budget, which was already bloated and totally out of control.
We expect a compromise on the debt ceiling that will leave spending far higher than necessary for a healthy economy.
We still expect significant weakness in the economy in the months ahead. With the potential for a downturn and/or still higher short-term interest rates, we recommend cash (currently earning 5 percent) for a large part of your equity portfolio.
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Outlook
Economic Fundamentals: negative
Stock Valuation: S&P 500 overvalued by 9 percent
Monetary Policy: restrictive
