Market Wire: US Inflation Stabilises and Spending Slows, Supporting Fed Easing

Consumer price growth held steady and “control group” retail sales turned negative in the United States last month, suggesting that the economy is slowly losing momentum, and helping bolster the case for Federal Reserve rate cuts later this year. According to data published by the Bureau of Labor Statistics this morning, the core consumer price index - with highly-volatile food and energy prices excluded - rose 3.6 percent in April from the same period last year, up 0.3 percent on a month-over-month basis. This was precisely aligned with consensus estimates among economists polled by the major data providers ahead of the release.

On a headline all-items basis, prices rose 0.3 percent on a month-over-month basis in April, up 3.4 percent over the previous year, and down from the 3.5-percent pace set in March. Americans paid 2.8 percent more for energy on a month-over-month basis, with higher gasoline prices lifting the headline print, while the shelter sub-index climbed 0.4 percent, with housing costs remaining the biggest contributor to overall inflation pressures.

Separately, US retail spending missed forecasts last month, suggesting that underlying consumer demand is beginning to fade. According to figures published by the Census Bureau this morning, so-called “control group” retail sales - with gasoline, cars, food services, and building materials excluded - fell -0.3 percent in April, undershooting estimates set at 0.2 percent.

Total receipts at retail stores, online sellers and restaurants flatlined on a month-over-month basis in April, up 4 percent over a year prior. Markets were expecting a 0.4-percent monthly headline gain after March’s overheated 0.7-percent increase.

Short-term Treasury yields are plummeting, with both the 2- and 10-years falling as investors lower policy rate expectations, and the dollar is extending this morning’s declines. Equity markets are rallying and risk-sensitive currencies are seeing sharp gains.

Bottom line: The US economy is showing signs of exhaustion, aligning with Federal Reserve chair Jerome Powell’s repeated assertion that rates are in restrictive territory - and helping set the stage for an easing cycle beginning in the early autumn. Policymakers are unlikely to react decisively to this morning’s data, and a rate cut this summer looks relatively improbable, but official rhetoric should turn more dovish over the coming days and weeks - and the dollar’s long run of outperformance should begin to fade.