Markets are waiting for confirmation that U.S. consumer spending is recovering
May U.S. consumer sentiment expected flat
U.S. inflation may be perking up
Saturday’s G7 meeting could produce some market-moving news
Markets are waiting for confirmation that U.S. consumer spending is recovering — The market consensus is that today’s April retail sales report will show a strong increase of +0.6% m/m (+0.5% ex-autos) following March’s weak report of -0.2% (unchanged ex-autos).
Vehicle sales in April showed a paltry rebound to 16.81 million units after March’s plunge to a 2-1/4 year low of 16.53 million units. However, April vehicle sales were still relatively weak and were well below the 12-month average of 17.3 million units.
U.S. consumer spending flat-lined in February and March, which was the main reason behind the weak Q1 GDP report of +0.7% (q/q annualized). Consumer spending contributed a negligible 0.23 percentage points to the Q1 GDP report of +0.7%, far weaker than the contributions of more than 2 points seen in the last three quarters of 2016.
The reasons behind the weak consumer spending in February and March include bad weather in parts of the country and possibly political uncertainty. In addition, consumer financial distress has been slowly rising for some sectors. The credit card delinquency rate rose to a 3-year high of 2.34% in Q4 from the 2.16% level seen in the year-earlier period. In addition, subprime auto borrowers are running into trouble with loan losses on subprime auto loans rising to 9.1% in January from 8.5% in December, according to S&P.
In any case, the markets are expecting consumer spending to rebound in April and start providing more support to the economy. The Atlanta Fed’s GDPNow has penciled in a more normal 1.85 point contribution from personal spending to GDP in Q2. Improved personal spending is one reason GDPNow is forecasting that Q2 GDP will recover to +3.6%, although that increase is smaller at +2.6% excluding a 0.99 point expected contribution from inventories.
May U.S. consumer sentiment expected flat — The consensus is for today’s preliminary-May University of Michigan U.S. consumer sentiment index to be unchanged at 97.0 following the small +0.1 point increase to 97.0 seen in April. The index posted a 13-1/4 year high of 98.5 in January but then dropped back and is currently just -1.5 points below that high.
U.S. consumer sentiment is seeing support from the strong labor market, record highs in the stock market, strength in personal income, rising home prices, low gasoline prices, and hopes for a personal income tax cut. On the negative side, some consumers have told pollsters their confidence has been dampened by the political situation.
While U.S. consumer confidence remains strong, the question continues to be why spending was flat in February and March. That divergence would start to be eliminated if personal spending picks up in April.
U.S. inflation may be perking up — The inflation data that has been released thus far for April has been a bit startling. Thursday’s April PPI rose to a 5-1/4 year high of +2.5% y/y (consensus +2.2%) and the core PPI rose to a 2-1/4 year high of +1.9% (consensus +1.6%). Wednesday’s April import price report rose by +4.1% y/y (consensus +3.6%) and import prices ex-petroleum rose by +1.4% y/y (vs +0.5% as recently as January).
The consensus is for today’s April CPI to ease slightly to +2.3% y/y from March’s +2.4% and the core CPI to be unchanged from March’s +2.0% y/y. The markets were relieved when the CPI in March eased to +2.4% y/y from Feb’s 5-year high of +2.7% y/y and the core CPI eased to +2.0% y/y from Jan’s 8-1/2 year high of +2.3%.
However, the PPI and import prices data reports for April have caused new concern that the CPI might also see a rise in today’s report for April. Indeed, the 10-year breakeven inflation expectations rate on Thursday rose sharply by +4 bp to a 1-1/2 week high of 1.91% due to the PPI report and the +4.2% 2-day (Wed-Thu) rally in June crude oil prices.
The Fed has not expressed any alarm about the inflation outlook since the PCE deflator in March was below its +2.0% inflation target. The March PCE deflator was at 1.8% y/y and the core deflator was at +1.6% y/y. However, if inflation starts to get a head of steam, the Fed will likely start talking about three more rate hikes this year rather than just two hikes. Indeed, Boston Fed President Rosengren on Wednesday said that he favors three more rate hikes this year to avoid an “over-hot” economy.
The market is now discounting the odds at about 90% for a rate hike at the next FOMC meeting in just four weeks on June 13-14. That would leave the Fed time for a third rate hike in September and a fourth rate hike in December, if four rate hikes should become necessary. At present, however, the market does not believe that is necessary and in fact is discounting only about a three-quarters chance for even the third rate hike by year-end.
Saturday’s G7 meeting could produce some market-moving news — G7 finance ministers and central bank chiefs will meet on Saturday in the Italian port city of Bari. G7 participants face a calmer situation now that the French election is over and the world economy is more stable. G7 participants will have a busy agenda and will also be laying the groundwork for the upcoming May 26-27 summit of G7 leaders in Sicily.