Little Reaction to Data

This week, the inflation data matched expectations while the consumer spending data fell short. Neither report had much lasting impact, though, and mortgage rates ended the week slightly higher. 

While the annual rate of increase in Core CPI has fallen from a peak of 6.6% in September, it remains far above the readings around 2.0% seen early in 2021, which is the stated target level of the Fed. Since overall inflation is still elevated, it is not surprising that the majority of individual components continued to show significant price increases. In particular, shelter (housing) costs remained stubbornly high and again were responsible for the largest portion of the increase. However, there were some interesting exceptions, such as used car prices which were 12% lower than a year ago. 

The Retail Sales report on Friday also received a great deal of attention, since consumer spending accounts for over two-thirds of US economic activity. In March, retail sales plunged 1.0% from February, far worse than the consensus for a decline of 0.5%. In general, consumers spent more on necessities such as groceries, while cutting back on autos, furniture, appliances, and building materials. Smaller tax refunds than last year due to a pullback in some pandemic-related tax breaks may have been one factor contributing to weakness in spending in March. 

While the minutes from the March 22 Fed meeting released on Wednesday contained no significant surprises, they provided additional insight into the additional challenges posed to officials by the recent troubles in the banking industry. Officials faced a tightwire act trying to balance their conflicting objectives of bringing down inflation (requiring tighter policy) and helping support the banks (requiring looser policy). According to the minutes, banks will likely be more selective now, leading to fewer loans to businesses and consumers. This will slow economic activity and reduce future inflationary pressures, but the magnitude of its impact is extremely difficult to predict. Investors are split about whether the Fed will raise the federal funds rate by an additional 25 basis points at the next meeting on May 3 or hold them steady.

Investors will continue to keep a close eye on the banking sector for signs that troubles are spreading to other institutions. They will also watch to see if Fed officials elaborate on their plans for future monetary policy. It will be a light week for economic data with a focus on the housing sector. Housing Starts will be released on Tuesday and Existing Home Sales on Thursday.