Rising Markets and Falling Inflation

May 16, 2024

My dad has taught me a lot about investing over the years, but one adage of his I always reminder myself of is “some days (or weeks) are better than others.” That has held particularly true in 2024 as market direction, investor sentiment, and my resulting emotional state (ha!) have seemingly changed by the week (sometimes by the day) this year.

This week, I’m happy to say, was an upbeat week as equity market indices hit all-time highs and treasury yields fell (taking bond prices up). A main reason for this rising market trend was falling inflation (which is a key factor the Federal Reserve needs to confirm before it begins lowering interest rates).

On Tuesday, Producer Price Index (a measure of wholesale pricing) posted its highest rate of change in a year. PPI rose 2.2% year over year in April, ahead of the downwardly revised 1.8% in March. Markets took this increase in stride, likely due to some key carryovers to CPI (ie: P&C and auto insurance showed downward movements) and the prior month’s revision.

On Wednesday, Consumer Price Index (or CPI) also showed moderating inflation. CPI rose 3.4% year over year in April, down from March’s 3.5% rate. Prices rose 0.29% month over month, ever so slightly below 0.30% expected number. The two main lingering components of inflation (shelter and auto insurance) both moderated in the month, which is also encouraging for future trend lines. Goods inflation is in a strong downward trend line, with a 0.11% decline month over month. The only line item showing a strong increase was apparel (rising 1.20% in the month vs. 0.65% last month). That seems unusual and likely a one-off. All of these details support continued declines in inflation, which is good news for equity and bond prices and likely the main cause of the rally. Many observed this is the first “good” inflation report all year and markets certainly responded accordingly.

Further good news came this week from the Retail Sales Report. This report was an example of “bad news is good news” as the report showed a slowdown in consumer spending (April retail sales were flat versus an anticipated 0.4% gain). This decline in consumer spending was viewed positively by markets as it should drive further declines in inflation.

All in all, this week was certainly one that was “better than others.” What will next week bring? That remains to be seen – which is what makes investing so darn much fun!

Onward we go,

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