Inflation Eases as Core Prices Post Smallest Gain in Years Core prices logged their lowest increase since April 2021, offering relief to investors and the Fed after a run of data at the start of the year revealed simmering price pressures.

The consumer-price index, a gauge for goods and service costs across the U.S. economy, rose 3.4% in April from a year ago, the Labor Department said Wednesday. Core prices that exclude volatile food and energy items climbed 3.6% annually, the lowest increase since April 2021.

Wednesday’s inflation data should also allow officials at the Fed to breathe more easily because it suggests prices and economic activity aren’t reaccelerating. A separate report Wednesday showed retail sales were flat in April, reaffirming that hypothesis.

“This is a very comforting report,” said Erica Groshen, a senior economic adviser at the Cornell University School of Industrial and Labor Relations. “It is consistent with the view of a soft landing.” (…)

The pressure is off for a few months. Core CPI had been rising quarterly since Q3’23: from 3.0% annualized in Q3, 3.4% in Q4, 4.2% in Q1’24. April’s 3.5% a.r. rate breaks the trend, although the first 4 months clock at 4.2% annualized. Last 3 months: +4.1% a.r., still far from the 2% target.

• Core goods prices fell 0.1%, driven almost entirely by new and used autos (down 0.4% and 1.4%, respectively).
• “Other” core goods prices rose 0.5%, the largest increase since August 2022. On a core or total basis, the slowdown in goods inflation has accounted for the bulk of the decline in inflation since its peak in mid- 2022.
• “Prices for services ex-energy have risen 5.3% over the past year compared to an average annual rate of 2.8% from 2015-2019. The April CPI showed inflation in the service sector easing once again, albeit at a still-painfully-slow pace. Core services prices rose 0.4% in April, returning to its Q4-23 pace. Primary shelter inflation eased somewhat further, with both owners’ equivalent rent and rent of primary residences moderating to a monthly increase of 0.41%.
• Excluding primary shelter, services inflation cooled more materially in April, with the “super core” up 0.4% after a 0.7% gain March. Contributing to the moderation was slower growth for medical services (+0.4%) and motor vehicle insurance and maintenance.” (Wells Fargo)

The Inflation Battle Is Far From Over Services price gains all but rule out rate cuts in the near term. (John Authers)

(…) The problem is that services inflation remains stubbornly high, and accounts for substantially all of headline inflation at this point:

(…) Breaking this down further, the following chart shows inflation for owner’s equivalent rent (a highly contentious measure of shelter cost), and for two measures that were rarely cited before this surge in prices began, but which are now at the center of the debate. One is so-called “supercore” inflation, which measures services excluding shelter, and which the Fed regards as important, and CPI excluding food, shelter, energy and used cars. Most people do need to buy all of these things, but the Bureau  of Labor Statistics began printing this number in 2021 at a point when inflationary pressure was concentrated in those items. This is what  they look like:

(…) Most disquietingly, supercore is on a continuing rising trend. It’s near 5%, and far above any level with which the central bank can be comfortable. It turned upward last fall (coincidentally or otherwise, when Federal Reserve Chair Jerome Powell executed his infamous “pivot” toward reducing rates) and its rise continues. Viewed on a month-on-month basis, supercore rose less in April than it had in the three preceding months of the year, but it still looks historically high. This alone more or less rules out a rate cut as early as next month:

(…) That trend is confirmed by the Atlanta Fed’s sticky price index, which concentrates on goods and services whose prices take a while to change and seldom fall. This is seen as inflation that’s particularly difficult to reverse, and so any rise will make the central bank uncomfortable. It is coming down, but very slowly, and it remains above 4%:

Taken together these confirm that disinflation is still happening while there is no sign of an outright acceleration. So rate hikes look very unlikely. But cuts in the near term can also be ruled out as several key measures are sticky and remain too high. (…)

What the Stall in April Retail Sales Says About the Consumer

One theme of this Fed tightening cycle, now entering its third year, is how consumers have been undaunted by higher borrowing costs. Yet, the fact that retail sales stalled in April is not necessarily a sign the consumer is spent; but for once at least it does not show continued evidence of an unstoppable consumer.

Not only did the unchanged headline number come in short of expectations, but the control group aggregation of sales categories gave back 0.3% of last month’s 1.0% gain.

There are reasons to be skeptical of the sustainability of consumer spending beyond today’s retail sales report, such as the depletion of pandemic-era savings and the unsustainability of ever-more consumer credit growth to sustain spending. In short, we see reasons for the consumer to eventually take a breather, but we are not convinced that this soft print is evidence of that exhaustion.

There are more than a few special factors to consider that make today’s report less compelling as evidence of a major consumer pivot. For starters, the timing of Easter was earlier than usual, a dynamic that flatters March data and potentially weighs on April, the month that usually includes that spring holiday and the associated surge in consumer outlays that goes with it.

Another dynamic is online spending reflected in the non-store retailer category. Once a tiny component, consumers now spend more online than they do anywhere else, except when they purchase an automobile. The top-dog in this space, Amazon, hosted its Spring Sales Event in the final week of March. It is not uncommon for other online sellers to offer concurrent discounts. The upshot is many households pulled forward demand, buying a bunch of stuff online in March, so no surprise to see that category down 1.2% in April. (…)

U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Economics

Producer Price Index: Wholesale Inflation Rises to Highest Level in a Year

The producer price index for final demand increased 0.5% month-over-month (s.a.), more than the expected 0.3% growth. On a non-seasonally adjusted annual basis, this month’s headline PPI accelerated from 1.8% in March to 2.2% in April, as expected. This is the highest level since April 2023.

Core PPI (excluding food and energy) for final demand rose 0.5% from last month, more than the expected 0.2% growth. On a non-seasonally adjusted annual basis, core PPI accelerated from 2.1% year-over-year in March to 2.4% in April, as expected. This is the highest level since August 2023. (…)

Powell on the April PPI: “I wouldn’t call it hot. I would call it sort of mixed.”

Goldman Sachs:

The producer price index (PPI) increased more than expected in April. Core producer prices also increased more than expected, as the PPI excluding food and energy rose 0.5%, and the PPI excluding food, energy, and trade services increased 0.4%.

We estimate that the core PCE price index increased 0.25% in April, corresponding to a year-over-year rate of +2.76%.

The red line is the main problem area.

CONSUMER WATCH

The NY Fed released Q1 data on consumer indebtedness:

China Considers Government Buying of Unsold Homes to Save Property Market If authorities do proceed, it would mark a new phase in the Chinese government’s campaign to address the biggest drag on its economy.

(…) Local state-owned enterprises would be asked to help purchase unsold homes from distressed developers at steep discounts using loans provided by state banks, according to two of the people. Many of the properties would then be converted into affordable housing.

Officials are still debating details of the plan and its feasibility, the people said, adding that it could take months to be finalized if China’s leaders decide to go ahead. (…)

China’s home sales plummeted about 47% in the first fourth months and unsold housing inventory is hovering at an eight-year high, exacerbating a meltdown that threatens to put about 5 million people at risk of unemployment or reduced incomes.

The plan can “inject liquidity to developers directly and improve their financial situation, as well as immediately digesting excess inventory,” said Raymond Cheng, head of China property research at CGS International Securities HK. “This is all win situation. Of course, it needs a lot of funds – at least 1 trillion yuan to make the impact more meaningful.”

Shujin Chen, head of China financial and property research at Jefferies Financial Group, estimated at least 2 trillion yuan ($277 billion) of investments would be needed. (…)

Unsold housing inventory climbed to 3.6 billion square feet last year, the highest since 2016, official data showed. It will cost at least 7 trillion yuan, or 78% of China’s budget deficit this year, for the government to absorb the inventory in 18 months, Tianfeng Securities estimated.

The new plan to enlist local governments to reduce housing glut could further exacerbate their debt level, which has soared to 56% of gross domestic product as of last year. Banks would also be under pressure as their balance sheets have already been eroded by rising bad loans and narrowing margins.

With America Off-Limits, China EV Makers Aim to Conquer Rest of World Carmakers in China are accelerating a sales push in Europe and Southeast Asia and are looking to produce more abroad.

The 100% tariffs on Chinese EVs announced Tuesday in Washington are more of a symbolic blow than a practical one for Chinese carmakers. They have almost no business in the U.S. and already recognized that the political hurdles to entering the market were insurmountable.

The cold shoulder from Washington won’t change Chinese EV makers’ ambitions for global dominance, analysts said, but it will spur adjustments. The companies will emphasize emerging markets and localize production where possible, seeking to woo governments that are more open to Chinese EVs.

And some companies might focus on supplying EV technology, an approach that could lessen the political backlash and offer an indirect path to U.S. business. (…)

Thanks to America’s tariffs, U.S. carmakers will enjoy protection against low-cost Chinese competition. The flip side: “U.S. consumers will not have access to the world’s highest-quality and least-expensive electric vehicles,” said Cory Combs, associate director at the consulting firm Trivium China.

In China, the leading EV maker, BYD, offers a compact model with a range of about 200 miles on a single charge for the equivalent of less than $10,000. A version of its higher-end Seal sedan, with a range of around 340 miles, starts at around $25,000 in China. In the U.S., a version of Tesla’s Model 3 sedan with a similar range has a price tag of around $43,000, the carmaker’s website showed. (…)

China’s car exports have nearly quintupled over the past three years to about five million vehicles in 2023. While many are gasoline-powered cars shipped to Russia, others are EVs sent to Southeast Asia, Europe and elsewhere.

Another tactic is to open factories outside China in markets that are receptive to Chinese-branded EVs. BYD is opening new factories in Brazil, Hungary, Thailand and Uzbekistan and considering one in Mexico. The Chinese carmaker Chery Automobile plans to build cars in Spain with a local partner, Ebro-EV Motors. (…)

European policymakers, while weighing tariffs on China-made EVs, see the matter differently from the U.S. They want to induce Chinese companies to build factories in Europe rather than blocking Chinese-branded vehicles altogether, analysts said.

During Chinese leader Xi Jinping’s visit to Europe this month, French Finance Minister Bruno Le Maire said China’s auto industry, including BYD, was welcome to pursue industrial projects in France. (…)

Trump said at a March campaign rally in Ohio that he would welcome Chinese companies’ building car factories in the U.S. if they used American workers. (…)

Leapmotor, a Chinese EV startup, and Jeep’s parent, Stellantis, said Tuesday that they would start selling Leapmotor’s mass-market EVs in Europe in September. Other global markets—but not the U.S.—will follow soon after, the companies said.

Those EVs would be exported from China or made at Stellantis plants around the world. Last year Stellantis said it was investing €1.5 billion, the equivalent of $1.6 billion, in Leapmotor.

Stellantis Chief Executive Carlos Tavares described the strategy as a way to accommodate different duties scenarios.

Monday I wrote:

What will Chinese manufacturers do? Export their cheaper cars to untapped markets such as Central and South America, Africa and South-East Asia, effectively creating, and occupying new markets for cheaper cars, trucks and buses.

In the chart below, the top 3 regions (vehicle penetration averages 657) have total population of 905 million. The next 18 (vehicle penetration averages 147): 4.5 billion people.

Data: Visual Capitalist

S&P 500 Is Going Nowhere Through Year-End, Goldman’s Kostin Says

The firm’s chief US equity strategist reiterated his 2024 price target on the benchmark of 5,200 in an interview with Bloomberg Television on Tuesday, while noting he sees “roughly a flat return from now until the end of the year.”

That forecast is just below where the US stock benchmark is currently trading after a 10% advance since January. Kostin says the bank’s modeling — which incorporates the economy, earnings, valuation and money flow — implies no room for further upside. Goldman’s economists see real US gross domestic product growth this year of around 3% and the bank’s equity strategists project earnings growth of 8% in 2024, while highlighting that valuations are already historically high.

“The probability of a multiple expansion, while possible, is less probable,” Kostin said. (…)

One upside risk to Kostin’s outlook is if officials dial back interest rates more aggressively than markets currently anticipate, he said, while emphasizing that’s not in the cards at this point. (…)

• Cash levels among fund managers have fallen to even lower levels versus last month. In other words, complacency is approaching multi-year highs

How to survive while losing $7.5 billion

By Felix Salmon

Data: FactSet; Chart: Axios Visuals

No company has done a better job of taking advantage of its meme-stock status than movie theater chain AMC, a company that, improbably, is still worth billions even after losing $7.5 billion over the past five years.

By issuing enormous quantities of new stock, most recently on Monday, AMC has raised enough cash to keep itself afloat.

The sale of 72 million shares that AMC concluded on Monday brings the company’s total share count up to 296 million. Pre-pandemic, AMC’s total number of shares outstanding was just 11.8 million.

• That’s why AMC’s share price has fallen by 89% since the end of 2019, even as its market value — boosted by the last couple of days of meme-stock frenzy — has risen by 39%.

Where it stands: AMC stock, which closed at $2.91 on Friday, opened at $11.71 on Tuesday before falling back to close at $6.85. What’s going to happen today is anyone’s guess.

Follow the money: AMC raised $1.8 billion in 2021 by selling shares into the meme-stock frenzy — enough money to keep paying the bills and avoid bankruptcy.

• The same playbook seems to be working in 2024, too.

Being a meme stock is sometimes bad for companies. “It can tank acquisition plans and talks, and make it very hard to retain senior people,” says Dan Egan, director of behavioral finance at Betterment.

• In the case of AMC, however, the appetite for the stock from self-described degenerate apes has meant the difference between life and death.