E On The Street Hypotheses' Burning, As The Slow-Growth Economy Keeps Turning

After largely discounting a slow first-quarter of the year, the strategist and analyst communities were crowing about an expected second-quarter rebound. A stronger-than-expected April PPI reading had some inflation hawks calling for a strong CPI reading. The bond market was having none of it and, in spite of a soft 30-year U.S. government bond auction (which followed soft 10-year and 3-year UST auctions), long-term UST yields declined. There was the expectation that strong PPI data would lead to strong CPI data. However, in a world in which competition for consumers’ dollars are fiercer than I can remember, I questioned whether or not businesses could pass increases on to consumers. I was not alone. That appeared to be the consensus view among bond market participants. April CPI and Retail Sales data justified our cautious outlook.

April Consumer Prices rose 0.2%, on a monthly basis. This was up from a prior -0.3% and in line with the Street consensus estimate. Core CPI (ex-food and energy) rose just 0.1% in April. This was up from a prior -0.1%, but below the Street consensus estimate of 0.2%. On an annual basis, CPI rose 2.2%, down from 2.4%. Core CPI (ex-food and energy) printed at 1.9%, down from a prior 2.0%.

April Retail Sales rose 0.4%, month over month. Although this was lower than the Street consensus estimate of 0.6%, the March figure was revised upward to 0.1% from an initial reading of -0.2%. Core Retail Sales (ex-autos and gasoline) rose 0.3%, this was down from a prior revised 0.4%, but that was an improvement from an initial reading of 0.1%.The so-called Retail Sales Control Group (ex-autos, gasoline and building materials) printed at 0.2%. Although this was lower than the Street consensus estimate of 0.4%, the March reading was revised up to 0.7% from an initial reading of 0.5%.

The data says much about the U.S. economy. For one, the CPI data tell us that businesses may be unwilling or unable to fully pass on higher prices to consumers in a very competitive market place. This could augur for tamer consumer inflation than inflation hawks are predicting. Secondly, the unwillingness or inability of businesses to pass on costs to consumers could begin to squeeze profit margins. I do not see this as problematic, per se, as U.S. corporations currently enjoy healthy profit margins. A little margin squeeze probably doesn’t hurt them much. However, it could result in smaller share price gains and dividend increases, in the not-too-distant future.

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Disclaimer: The Bond Squad has over two decades of experience uncovering relative values in the fixed income markets. Let ...

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