Stock bulls remain optimistic as data indicates a slowdown in manufacturing inflation

Stock bulls remain extremely cautious but a bit more optimistic as data indicates a slowdown in manufacturing inflation. The Producer Price Index rose +11% year-over-year in April, higher than expected but a meaningful pullback from March’s +11.5%. Producer prices lead consumer prices, so the report is a good sign overall, though investors, as well as the Fed, will need to see a couple more months of declines before declaring that inflation is indeed cooling.

Inflation

Economists also warn that goods inflation may be coming down because consumer demand is shifting more to services, meaning high prices could simply be moving from one part of the economy to another. The latest data shows services prices are rising at the fastest rate in three decades with airfare leading the way. Even if inflation has peaked, the question now is, how long will it remain elevated?

Federal Reserve Chair Jerome Powell cautioned yesterday that he can’t guarantee the central bank can deliver a so-called “soft landing” for the economy, pointing to the tight labor market and ongoing supply chain dislocations. Powell also stressed that other “huge events” are playing important roles right now, including Russia’s war in Ukraine, that are beyond the Fed’s control. Powell made the comments after being confirmed by the Senate for a second 4-year term.

The central bank’s target inflation rate is still a “flexible +2%” but several officials have indicated that the new normal might be more in the +2.5% to +3% range. One of the main gauges (but not the only one) the Fed uses to determine the rate of inflation is the Core PCE Prices Index, which for March was running at +5.2%. The April read is due out on May 27, which is a couple weeks ahead of the Fed’s next meeting on June 14-15.

Data to watch

Consumer data recently has been sending mixed signals that are hard to interpret. Sentiment has been mostly falling since the start of the year but consumer spending has not shown any signs of pullback.

Next week, investors get an update on how spending is holding up via April Retail Sales on Tuesday. A slew of fresh housing data next week will provide a deeper look at how substantially higher mortgage rates might be impacting the market. The NAHB Housing Market Index for May is out on Tuesday, followed by April Housing Starts on Wednesday, and April Existing Home Sales on Thursday.

Several key earnings are on the calendar next week as well, including Home Depot and Walmart on Tuesday; Cisco, Lowe’s, Target, and TJX Companies on Wednesday; Applied Materials, Palo Alto Networks, and Ross Stores on Thursday; and Deere & Co. on Friday.