• Posted on May 16, 2024
  • by MI2 Research

“… the lack of action is destroying the economy”

It’s another week of heavy-hitting inflation data, with PPI coming in hotter than expected, CPI was in line with expectations on a year-on-year basis, and import prices “rose by the most in two years in April amid rising costs for energy products and other goods”. Under the hood, both CPI and import prices showed additional signs of running hot, with the latter featuring an upwardly revised 0.6% month-on-month change in March, and the CPI data, including hot readings in some of the niches and metrics followed by Powell et al., such as the  4.0% annualized reading in six-month Core CPI and a sobering 6.0% annualized reading in six-month Core Services.

Despite signs that inflation is remaining doggedly persistent, bond markets extended their May rebound. Are they pricing in economic weakness? Perhaps. Marginal signs of weakness appeared this week in the Philly Fed’s Manufacturing Survey, “Manufacturing in the region weakened overall” the Empire Fed’s Manufacturing Survey noted that “Business activity continued to decline”, while the NFIB’s SBOI included the warning that “… owners remain historically very pessimistic… and expectations for economic performance in the second half of the year depressed”. (Though, the NFIB’s reading did see “the first of increase of this year but the 28th consecutive month below the 50-year average”.)

Additional weakness can be found in the relative dynamics discussed last week, with a host of recent indications that the consumer, particularly the left end of the income distribution, is starting to feel the pinch. Retail sales “were flat” in April, falling short of expectations, though one commentator suggested that “households pulled forward demand, buying a bunch of stuff online in March”.

Walmart added to the chorus, with the details of its latest earnings report adding to “signs that shoppers are pulling back under the growing weight of higher prices and the higher costs of carrying debt”. (Related, the latest Empire Fed Quarterly Report on Household Debt and Credit noted a steady rise in delinquencies).

However, it was a comment in the Dallas Fed’s latest Banking Conditions Survey that most succinctly united a few themes we’ve been following recently and voiced a sincere plea to Jerry P:

“The Fed is focused on jobs and inflation, but the lack of action is destroying the economy. The wealthy are unfazed, but the middle and lower class are the most negatively affected. Every day I read about another major company declaring bankruptcy, more employee layoffs, more bank branch closings, and all these actions are creating more misery for all but the wealthy. The Fed needs to take the wealthy out of the equation and start lowering rates.”

P.S. As our in-house Japan expert noted, the Land of the Rising Sun now has both the “stag” and the “flation”, with GDP down 2.0% QoQ, annualized, in Q1 while the GDP deflator was up 3.6% YoY. “So, they’ve got that going for them.

P.P.S. In contrast to the disruptive droughts that we noted a few years ago in Europe (which had carried inflationary implications), this year, we are seeing the other end of the spectrum in many places, with Brazil, Italy, China and the UK all suffering to various degrees from abnormally high amounts of liquid sunshine.