US Inflation Takes Small Step in Right Direction

For the week ending 17 May 2024

As of midday Friday, global equities traded near record territory as investors welcomed a mild deceleration in US inflation. The yield on the US 10-year Treasury note fell 9 basis points to 4.40% while the price of a barrel of West Texas Intermediate crude oil was little changed at $79.10. Volatility, as measured by the Cboe Volatility Index (VIX), slipped to 12.3 from 12.9 a week ago.

MACRO NEWS

US CPI eased in April, retail sales flatlined

Consumer prices rose 0.3% in April from March, slightly below the 0.4% consensus forecast, while core inflation rose 0.3% as expected. On a year-over-year basis, prices rose 3.4% in April, down from 3.5% in March, while core slowed to 3.6% from 3.8%. Though the data were an improvement, they remain well above levels that would give the US Federal Reserve the confidence it needs to cut rates soon. Inflation-wary investors were cheered by a soft US retail sales report, which showed sales were flat in April from March. Odds of a September rate cut edged up to about 85% after the data from 75% before it. However, in public remarks after the data were released, Fed policymakers appeared to be in no hurry to adjust policy.

Biden imposes new tariffs on China

As foreshadowed last week by the White House, the Biden administration unveiled a series of tariff hikes on imports from China. Most notable was the 100% levy on electric vehicles, raised from 0.25%. The tariff rate on solar cells and semiconductors was doubled to 50% from 25% while duties on various item that were previously tariffed at between 0% and 7.5% were raised to 25%. About half the items listed will see tariffs on them hiked this year. Some will be phased in in 2025 and 2026.

China unveils fresh stimulus amid credit contraction

In April, total social financing, a broad measure of credit in China, contracted for the first time since 2005. This development comes amid continued stress in the country’s property sector and downbeat consumer and business sentiment. China sold its first batch of ultralong special sovereign bonds on Friday, with the proceeds slated to be used to stimulate the economy. Also on Friday, the government announced a support package that lowers downpayments for homebuyers, scraps the minimum national mortgage rate and introduces a mechanism to help state-owned enterprises buy up excess inventory from property developers and convert it to affordable housing. The moves come as Chinese new home prices recorded the largest drop in a decade, falling 3.5% year over year in April. 

QUICK HITS

The Federal Reserve Bank of New York’s April survey of consumer expectations showed that one-year inflation expectations rose to 3.3% from 3% in March while five-year expectations rose to 2.8% from 2.6%.

Robert Lighthizer, US Trade Representative under former President Donald Trump, who is expected to serve with Trump again if he wins, spoke to the Wall Street Journal this week, seeking to dispel concerns among market participants over market risks in the event of a Trump victory. Lighthizer said that no policymaker he knows is working on a plan to weaken the US dollar. He added that the independent Fed system is a great accomplishment and the last thing he would do is try to change it.

Japanese long-term bond yields rose to the highest level in more than a decade this week as the Bank of Japan unexpectedly trimmed the size of its bond-buying operation.

Slovakian Prime Minister Robert Fico was seriously wounded during an assassination attempt on Thursday. Both the country’s president-elect and the outgoing president appealed to Slovaks to overcome their political differences for the good of the country.

This week, the European Commission held its quarterly economic growth forecast steady, predicting a 0.8% expansion this year that will accelerate to 1.4% in 2025. The EC projected that inflation will fall more quickly than it did a quarter ago, declining to 2.5% this year and 2.1% next, down from 2.7% and 2.2% previously.

Argentina’s central bank cut interest rates to 40% from 50%. Rates peaked at 133% in December around the time that President Javier Milei took office. Since that time, Argentina’s monthly inflation rate has fallen to 8.8% from 26%.

Unemployment in the United Kingdom rose 0.1% in March, to 4.3%.        

Japan’s economy contracted at a 2% annual rate in the first quarter, making the Bank of Japan’s task of normalizing monetary policy more difficult.

US industrial production was unchanged in April from March.

New York Fed President John Williams on Thursday welcomed somewhat tamer April inflation data but said he sees no reason to change monetary policy soon, a sentiment echoed by a number of his FOMC colleagues.

The US Supreme Court rejected a constitutional challenge to the way the Consumer Financial Protection Bureau is funded. The court ruled that Congress has the authority to insulate the agency’s funding stream from political interference. According to the Wall Street Journal, unlike most federal agencies, which receive periodic appropriations from Congress, the bureau draws from the Fed what it deems necessary, up to a statutory cap. 

The S&P 500 Index, the Nasdaq Composite Index and the Dow Jones Industrial Average all reached record levels this week. The Dow eclipsed the 40,000 level for the first time.

US President Joe Biden and former President Trump, the presumptive nominees of their political parties, agreed this to two debates, the first on 27 June, followed by the second on 10 September. The debates are being held earlier in the campaign than usual, with the first meeting coming before either party’s nominating convention.

China released mixed April economic data on Friday. Industrial production outstripped expectations, rising 6.7% year over year, though retail sales fell short of forecasts, rising 2.3% from the year before.

Russian President Vladimir Putin and China’s President Xi Jinping met in Beijing this week and pledged a “new era” of partnership in opposing the US on a host of security issues.

The Conference Board’s index of leading economic indicators fell a more-than-expected 0.6% in April.