In this week’s Steady Investor, we look at some of the current events that are shifting the market, such as:
Inflation Ticks Lower in April, But Not Convincingly – The Bureau of Labor Statistics reported this week that the consumer price index’s (CPI) measure of inflation rose by 4.9% year-over-year in April. This inflation print marks a slight decline from March’s 5% reading but remains a solid improvement from the 9.1% peak reached in June 2022. Core prices, which strip out food and energy, rose 5.5% y-o-y in April, a slight improvement from March’s 5.6% increase. Higher core prices are largely a byproduct of pressure in services prices—and specifically, the shelter component, which makes up one-third of the index. The upshot here is that shelter prices measure what renters and homeowners are paying for new and existing leases, which means meaningful declines in rents will not show up immediately in the CPI number. Given that median rents in the U.S. have been falling, the shelter component should contribute significantly less to the CPI number by this summer and fall. Excluding shelter, food, and energy prices – the so-termed “supercore” inflation reading – prices were up 3.7% year-over-year in April. This latest inflation report supports the view that the Fed could pause rate increases at their next meeting. Even though inflation remains high, Fed officials have shifted to looking for signs that economic growth and inflation are stronger and higher than expected, neither condition of which is overtly apparent today. The labor market remains tight, but downward trending inflation and negative corporate earnings growth suggest the economy is not running too hot. According to the CME group, the market sees a 14% chance the Fed would hike another 25 basis points at the next meeting.1
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Keeping a Watchful Eye on Lending Standards – The regional bank ‘crisis’ has tapered off since the fall of First Republic Bank, but the legacy of bank stress in 2023 may be one of tighter lending and credit standards. These factors will be key to watch throughout the year. If banks decide that a dollar in reserves is better than a dollar lent to consumers or businesses, it could choke off a key source of capital and credit that would otherwise fuel growth. The Federal Reserve publishes weekly loan activity for small and large banks, which will be important to watch. But the Federal Reserve Bank of St. Louis also conducts a Senior Loan Officer Opinion Survey, which polls lending officers at major banks on credit and loan standards. So far, the polls suggest that many major banks are indeed tightening standards, as seen in the chart below. The chart looks at the net percentage of banks tightening standards for loans to small-, mid-, and large-size businesses, auto loans, and credit cards. Standards are tightening across the board, which is likely to impact economic growth in the second half of the year.3
Source: Federal Reserve Bank of St. Louis4
Still No Deal on the Debt Ceiling – Congressional leaders met with President Biden this week to discuss what it would take to raise the debt ceiling. So far, no progress on a deal has been reported. The two sides have agreed to meet again, however, which may factor as a positive sign. Debt ceiling standoffs have become more common in the last decade or so, the drama of which sometimes pushes up to the “X date” when the U.S. would need to start delaying payments on some obligations. It is unclear which payments would be missed first, but defaulting on debt – i.e., not making interest payments on bonds – would likely be last. Government wages, Social Security, Medicare, and other entitlement programs would likely see delays or “IOUs” happen first. For its part, the market does not seem to be too fazed by the posturing on the debt ceiling just yet. Stocks rose in April, and Treasuries were essentially flat – with both exhibiting relatively low volatility.5
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