Market Week: April 18, 2022

The week in review

PPI +11.2% y/y, +1.4% m/m
Retail sales +0.5% in March

The week ahead

NAHB home builders’ index
Flash PMIs

Thought of the week
While consumer prices were certainly very hot in March (Headline CPI +1.2% m/m, +8.5% y/y), they were no worse than feared. The Russian invasion of Ukraine continued to weigh heavily on energy (+11.0% m/m) and food (+1.0% m/m) prices. Together they were responsible for 82% of the m/m increase and 40% of the y/y increase. Excluding food and energy, core CPI (+0.3% m/m, +6.5% y/y) moderated by more than expected and saw its slowest monthly gain since September 2021. Price gains in durable goods like used vehicles (-3.8% m/m) showed early signs of easing. Despite this, core services (+0.6% m/m) remained sticky as owners’ equivalent rent rose 0.4% m/m and re-opening sectors such as transportation (+2.0% m/m), lodging (+3.3% m/m) and airlines (+10.7% m/m) stayed hot. Though the March CPI print was modestly encouraging, inflation still remains extremely firm. It continues to weigh heavily on business sentiment and will be an important theme to watch as 1Q earnings roll in. According to the National Federation of Independent Business small business’ optimism index, inflation now trumps quality of labor as the single most important problem business owners face, with 72% of firms saying they are being forced to raise their selling prices. All and all, March’s CPI report still warrants an aggressive Fed action in the months ahead to cool down consumer prices. Accordingly, the market is pricing in a 90%+ likelihood of a 50 bps hike in May and more than 8 hikes by year-end. Looking ahead, if this is peak inflation and we begin to see softening prints alongside signs that rate hikes are slowing economic activity, that should take some pressure off the Fed. But for now, make sure portfolios are poised to take on rate hikes by opting for high quality stocks with strong dividend potential, high quality and shorter duration bonds for portfolio ballast and alternatives for diversification.

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