Week of May 12
A Case Of The Gloomies
If there was a takeaway from the data, this past week I think it’s that the Fed has a clear sightline for a potential rate cut in June. Inflation (both consumer and wholesale) continues to trend lower, and the retail sales data suggested that consumers may be starting to pull back on spending in response to fears over the impact of tariffs on the economy.
The news earlier in the week that there is a cease fire in the trade war with China is potentially very good news. However, how and (more importantly) if a deal gets reached in the next 90 days is still very much up in the air and we could see some of those tariffs put back on.
Even with this reprieve there will likely be trade and price disruptions in the months to come. That, along with a payback from the first quarter pre-spending, will result in much slower economic growth over the next six months.
Important Data Points From The Past Week
U.S. Consumer Price Index (CPI)
Consumer price inflation rose tepidly in April, climbing 0.22% from March, while the core measure (excluding food and energy) rose 0.24%; both increases were mostly in line with market expectations. On a year-over-year basis, the headline CPI number was 2.3% above last year, while core was up 2.8%.
Canadian building permits took a dive in March, falling 4% from February. Residential permits were up 2% thanks to a multifamily gain, while nonresidential building permits plunged 15%.
Much of the decline in the nonresidential space was broad-based across the commercial and institutional sectors, while manufacturing was flat. We’re certainly going to see darker days ahead in Canadian construction, especially if job losses continue to accelerate due to tariffs. We may see some growth later in the year as the newly elected Liberal government increases public funding for health and education projects, but my forecast is still calling for a slight easing in permit growth.
U.S. Retail Sales
US retail sales posted very modest growth in April, rising 0.1% from March. March sales were particularly strong, likely due to pre-tariff purchases, and the April slowdown should be viewed as payback. Restaurant sales were brisk as were building materials sales, which given the recent consumer confidence reads is a surprise.
This first data point of the second quarter is evidence that consumer spending is downshifting in response to tariffs and economic uncertainty. This, along with soft inflation reads this week, I think, keeps the Fed on track for a June rate cut.
U.S. Producer Price Index
U.S. wholesale prices fell in April – their second consecutive decline – dropping 0.5% from a month earlier. The decline was due to a pullback in prices for services (-0.7%), while goods prices were unchanged. On a year-over-year basis, final demand prices were up 2.4%; a deceleration from March’s 3.4%.
Construction-related price gains were robust following equally strong growth the month previous. This is likely due to increased ordering in advance of tariffs. Given the moribund state of construction activity, I think price gains will moderate as inventory bloating ends and the reality sets in that construction is likely to move sideways through much of the year. So, the gains are in line with my March forecasts.
U.S. Housing Starts
U.S. housing starts ploughed ahead in April, rising 1.6% from March. Single family starts were down 1.6%, while multifamily starts rose 11.1%. Total permits issued were down 4.7% in the month – single family permits fell 5.1% while multifamily permits were down 4%.
The housing market is entering a new phase. Single family starts are downshifting due to affordability and rising construction costs; however, what’s bad for the single family market is good for multifamily. April’s numbers are right in line with my forecast of a slowdown in single family starts paired with a solid rise in multifamily starts.
Canadian Building Permits
While not the Fed’s preferred measure of inflation it should provide them with some solace that inflation continues to trend lower. I do think, though, that this is short lived as the tariff impact will start to impact the data next month. This will give the Fed continued justification to hold interest rates steady for the short-term; at least until the labor market begins to weaken further, which I think is a late summer event.
What I’ll Be Watching This Week
This week will be another quiet data week. In the U.S. I’ll be watching the Conference Board’s Leading Indicator and new home sales, while in Canada there will be two inflation releases (CPI and industrial prices) along with retail sales.
What I Watched Last Week
This is Canadian comedy series set in a small Arctic town as young Inuk women tries to reinvent her life.
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