Investors are aggressively buying the dip in stocks after a morning where demand for risk-off instruments surged as renewed concerns over potential trade inflation and corporate margin compression mounted. Simultaneously, today’s retail sales report depicted consumers pulling back sharply last month following a surge in March expenditures, prior to liberation day tariffs being announced. Additionally, at 8:30 a.m. ET, the PPI posted its steepest contraction in wholesale stickers since COVID-19 in April 2020 while also printing its sharpest gain in monthly core goods costs in 27 months. Indeed, meaningful declines in services, food and energy charges, drove the headline to a huge downside miss despite the rise in physical products. Moreover, Walmart warned that it will continue to raise prices in the coming weeks. Market participants are titling to an offensive posture against this backdrop, scooping up equities in all sectors, Treasuries across the curve, gold futures, cyclical commodities ex oil and forecast contracts.
Wholesale Inflation Falls at Fastest Pace in Five Years
Wholesale inflation declined by the most in five years last month as margin compression, lower food costs and lighter energy prices produced a sizeable miss. April’s Producer Price Index (PPI) dropped 0.5% month over month (m/m), well below the 0.2% gain expected and the 0% recorded in March. Services stickers fell 0.7% m/m while goods were unchanged, as subtractions in food and energy of 1% and 0.4% countered the 0.4% increase in core goods, which was the strongest since January of 2023. Services related to trade, transportation/warehousing and the other category saw drops of 1.6%, 0.4% and 0.3%.
Consumers Take a Breather
Retail sales rose only modestly in April as consumers took the opportunity to replenish their finances following March’s significant outlays. Transactions grew just 0.1%, beating the median estimate of 0% but retreating from the prior month’s 1.7% gain. Across the 13 major categories, 7 experienced declines, with sporting goods, miscellaneous retailers and gasoline stations weighing the most, falling 2.5%, 2.1% and 0.5%. Clothing outlets, general merchandise establishments, health/personal care shops and automobile dealerships dropped at reduced magnitudes. Amongst the five positive contributors, restaurants/drink in parlors, building materials suppliers and furniture showrooms led with m/m gains of 1.2%, 0.8% and 0.3%. Electronics/appliance destinations and e-commerce posted the biggest increases while food and beverage stores were unchanged.
Homebuilders’ Sentiment Sinks as Affordability Drops
Homebuilder sentiment plunged to its lowest level in a year and a half amidst broad-based declines across the three major components and four regions. The NAHB/Wells Fargo Housing Market Index fell to 34 this month, the weakest figure since November of 2023, as mortgage rates north of 7%, all-time high prices and an uncertain backdrop pressure closings. Conditions for single-family sales in the present, in the next six months and the traffic of prospective buyers weakened from 45, 43 and 25 to 37, 42, and 23. Meanwhile, scores of 43, 43, 38, and 36 across the Northeast, Midwest, South and West fell to 42, 40, 33 and 28.
Unemployment Claims Are Stable
Initial jobless claims in the recent reporting period were unchanged, but continuing claims, which indicate the level of ease or difficulty that out-of-work individuals have with finding employment, increased modestly. Initial claims remained unchanged at 229,000 for the week ended May 10 and matched the consensus estimate. Conversely, requests for continued payments for the seven-day period closing on May 3 climbed from 1.872 million to 1.881 million, falling below the estimate of 1.890 million. Four-week moving averages moved from 227,250 and 1.874 million to 230,500 and 1.874 million.
Industrial Production Unchanged from March
Industrial production was unchanged in April relative to March, missing the estimate for a 0.2% gain following the previous result of 0.4%. Relative to April of 2024, production was 1.5% higher, slightly better than the 1.3% y/y improvement in March.
NY and Philly Manufacturing Gauges Stay Negative
Both the NY Empire State Manufacturing and Philadelphia Fed Manufacturing indices depicted weakness with May scores of -9.2 and -4 after recording -8.1 and -26.4 levels for the fourth month of the year. New York was worse than the estimate of -8.20 while the city of brotherly love surpassed the -11.3 estimate.
Positive Inflation Data Overall
This week’s inflation data was positive in aggregate, and I think price pressures will continue cooperating for the rest of the year despite tariff fears. Services are decelerating and food and energy costs are likely to cooperate. Goods as a percentage of our economy have continued declining year after year. High long-end yields also temper physical product charges as sellers lose pricing power when financing levels become so elevated (cars, furniture, electronics). Look at today folks, core goods jumped at the sharpest rate in 27 months, but the PPI still fell at the steepest pace since COVID-19 in April 2020. That’s because the disinflation from services, food and energy countered the inflation impact of goods. I expect that those categories will remain allies to investors, cushioning the blow of trade related price increases while bolstering economic growth and stock market performance.
International Roundup
Europe Industrial Production Picks Up
Industrial production in the euro area picked up in March, posting a 2.6% month-over-month increase, which exceeded the consensus estimate of 1.9% and the preceding period’s 1.1% growth rate. Relative to March of last year, production was up 3.6%, surpassing the median estimate of 2.5% and considerably stronger than the 1% pick up in February. According to Eurostat, capital goods and consumer durable goods led the m/m expansion with production increasing 3.2% and 3.1%, respectively. Non-durable consumer goods and intermediate goods production expanded 2.3% and 0.6% while energy dipped 0.5%. Germany, which is Europe’s largest economy, saw production climb 3.1% while Ireland, with a 14.6% jump, was the strongest.
And Employment Grows
Euro area employments grew 0.3% during the first quarter relative to the final three months of last year. Economists expected the increase to match the 0.1% growth rate of the fourth quarter of 2024.
UK Econ Activity Exceeds Expectations
The UK’s economy expanded 0.7% during the first quarter, accelerating from the 0.1% gain in the final three months of 2024, according to a preliminary result from the Office for National Statistics. Economists estimated gross domestic product (GDP) would pick up 0.6%. Conversely, the first-quarter y/y pace 1.3% was better than the estimate of 1.2% but eased from 1.5% in the fourth quarter of 2024.
But Industrial Production and Manufacturing Falter
Despite the UK posting stronger-than-expected q/q economic growth, March was disappointing for the non-services sector. Industrial activity sank 0.7% m/m, worse than the estimate for a 0.6% contraction and a reversal from the 1.7% northward movement in February. The y/y metric also dipped 0.7%, slightly better than the 0.9% decline estimated by analysts. Industrial production grew 0.4% in February. Manufacturing also weakened with a 0.8% decline following February’s 2.4% expansion. The March print matched economists’ expectations but the y/y decline of 0.8% was deeper than the estimate for 0.5% drop. In the preceding month, manufacturing climbed 0.5% y/y.
And Trade Deficit Falls
On a positive note, the UK trade imbalance during the first quarter declined by £3.6 billion from the fourth quarter of 2024 to £6.6 billion. The country’s surplus in services fell slightly to £48.6 billion but its goods deficit dropped by £4.3 billion to £55.2 billion.
Australia’s Labor Market Strengthens
The Australian labor market appears solid with its April unemployment rate staying unchanged at 4.1% and matching the median estimate even as the country’s participation rate increased from 66.8% to 67.1%. The rate is based on the total number of individuals that are either seeking work or employed. In April, employers snatched up 89,000 workers of which 59,500 were full-time recruits. This offset the impact of a high participation rate on the country’s unemployment rate. In another development, the Melbourne Institute Inflation Expectations Index found that consumer lowered their expectations for inflation over the next 12 months from 4.2% in February to 4.1% in March.
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