Investors focused on the US consumer price index

The April US Consumer Price Index will attract investors’ attention this week after the University of Michigan’s sentiment index was revealed last week to fall well below expectations, with a weak reading of current conditions and expectations. One of the reasons for this decrease could be inflation expectationswhich increased from 3.2% to 3.5% per year and from 3.0% to 3.1% over 5-10 years.

Markets will be focused on services inflation excluding housing, which was 8.7% annually in the first quarter of this year, down from 5.1% in the fourth quarter of 2023. Although some of the factors behind this inflation appear to be unsustainable as car insurance costs, it is difficult to predict the timing of the slowdown. Any rise in core CPI by a similar amount or above 36 basis points in March would trigger a negative market reaction, while any significant downside surprise would reassure investors and increase the likelihood of further Fed rate cuts later in the year.

From a broader perspective, inflation figures are unbearably high compared to the Fed’s 2% target, but the slowdown to date is impressive.

Key to this expert’s deflation optimism is housing, a component that makes up roughly 45% of core CPI and just under 20% of private consumption/core PCE deflator. Private market data shows that Housing inflation has fallen sharply, but this is not yet reflected in the CPI data.So we should see a significant slowdown in housing-led inflation in 2024, he explains.

Standing out from the rest of the week’s US indicators was the final demand-side inflation of the Producer Price Index (PPI), which is estimated to increase 0.3% month-on-month and 2.2% year-on-year, while the Non-Food and Energy Index producer prices would be 0.2% on a monthly basis and 2.3% on an annual basis; and U.S. retail sales, which are forecast to grow 0.4%, up from 0.7% in March.

Chinese watch

The market will also be watching a trove of data from China. Forecasts show the CPI rising 0.2% year over year and the CPI falling 2.3% after 18 straight months in deflationary territory. Producer price index deflation has in some cases occurred due to lower input prices, but it is usually caused by overcapacity, one of the main challenges facing the Asian giant. Continued deflation caused by inadequate demand relative to supply could increase the risk of companies defaulting as debt servicing becomes more difficult.

Prices aside, China’s economic activity outside the residential real estate sector will gradually improve as the year progresses thanks to the momentum built numerous government incentives.

For now, retail sales, industrial production and fixed investment in China are expected to strengthen in April, while housing prices, real estate investment and residential property sales will remain weak.

On the other hand, preliminary first-quarter eurozone GDP is forecast to rise 0.3% quarterly and 0.4% year-on-year, while Japan is forecast to fall 0.4% in real terms. in nominal terms, and in nominal terms it will increase by 0.2% with the GDP deflator at 3.3% annualized.

The UK’s exit from recession stands out with first-quarter GDP growth estimated at 0.6% quarter-on-quarter, as published last week. The Bank of England kept its monetary policy constant, but Pessimistic comments increased hopes of monetary easing after the June meeting..

Ronald Temple is Chief Market Strategist at Lazard AM.