The Market Today

Fading Fiscal Stimulus Hides Encouraging Wage Gains; Core Inflation Hits Fastest Rate Since 1992

by Craig Dismuke, Dudley Carter


Income Declines Post-Transfers but Employment Income Makes Strong Gain: After the stimulus bonanza of March, personal income settled back down 13.1% in April.  Transfer payments remained elevated relative to the pre-stimulus months on additional “other” payments (stimulus checks, primarily) and continued, elevated unemployment insurance transfers.  Most encouragingly, employment income rose a solid 1.0% to its highest level on record (meaning the pandemic decline has been completely erased). On the other side of the ledger, spending rose a solid 0.5% MoM after gaining 4.7% in March. However, spending was not up sharply enough in March to draw the savings level down from its pre-pandemic projected level. While the overall savings rate (savings/disposable income) from 27.7% to 14.9%, the amount of cumulative pent-up savings during the pandemic continued to accrue, now nearly $2.4 trillion.

Goods Trade Deficit Declines for First Time in 2021: The April advanced goods trade data showed imports fell $5.1 billion while exports rose $1.7 billion, bringing the monthly goods trade deficit down from $90.6 billion to $85.2billion. This marks the first monthly decline for the goods trade deficit in 2021. Interestingly, the weakness in imports came primarily from the hottest segment of the U.S. economy, the consumer and consumer goods. This is likely related to the reduction in North American auto manufacturing activity in the wake of the chip shortage.  The trailing 12-month goods deficit decreased to $992.1 billion, another record high. Disappointingly, total trade decreased $3.4 billion, or 0.9%.

PCE Inflation Firms Up More than Expected but Not Likely to Alter Fed’s Outlook: Not surprisingly, the Fed’s preferred PCE inflation measure heated up in April. Headline inflation rose 0.6% over the month as expected while core prices jumped 0.7%, firmer than the 0.6% gain economists expected. Previously released CPI and PPI metrics signaled monthly gains would be large, pushed up by supply disruptions to the auto sector and the reflationary effects of reopening on some services sectors. In the details of the PCE report, used auto pricing jumped 6.7%, its second largest monthly gain since 1966. More broadly, pricing for both durable and non-durable goods was firm, excluding a drop in energy-related costs. The larger services sector also saw firmer pricing in April, with the 0.55% monthly increase marking the strongest gain since 2007 and second-hottest print since 2001. Similar to the CPI report, airfares and hotels saw unusually large price gains amid economic reopening. The strong monthly gains for the headline and core measures compounded the base effects of comparing April 2021 prices to those in April 2020, which represented the weakest reading of the pandemic. As a result, headline inflation rose 3.6% YoY and core inflation increased to 3.1%, both faster than expected but unlikely to change the current paradigm among Fed officials.

Inventories Mixed: In the inventories data, wholesale inventories rose 0.8%, better than the 0.7% gain expected, while retail inventories shrank by a larger-than-expected 1.6%, not surprisingly led lower by a large drop in auto-related inventories.


Global Stocks Gain as Data Shows Outlook Improving as 2021 Progresses: Treasury yields, which had risen overnight alongside a central-bank spurred increase in U.K. yields, climbed to new highs after economic data showed continued improvement in jobless claims and business investment in equipment. The 10-year yield reached as high as 1.62% heading into an auction of 7-year notes. After a couple of weaker auctions in February and March, Thursday’s sale of $62 billion in 7-year debt stopped through by 0.6 bps and printed a strong bid-to-cover ratio. The 7-year yield rose 2.4 bps Thursday to 1.26% while the 10-year yield added 3.1 bps to 1.61%. Encouraging economic data and a higher and steeper yield curve likely played a role in the financials sector’s second-place finish within the S&P 500. The group gained 1.2% and was surrounded by solid performances for other cyclical sectors. The broader S&P 500, however, only edged higher, rising 0.1% and splitting a 0.4% gain for the Dow and a flat finish for the Nasdaq.

Global equity markets had strengthened early Friday ahead of another dense morning of U.S. economic reports. Following gains across most Asian markets, Europe’s Stoxx 600 had added 0.5% at 7 a.m. CT, enough to register a new record high for the index. Data releases earlier in the day revised France’s 1Q21 GDP down from an unannualized 0.4% expansion to a -0.1% contraction, adding it to a group of countries across the continent that entered a double-dip recession around the turn of the year. However, the outlook has improved since then amid rising vaccinations and some loosening of virus restrictions on activity. The latest piece in a growing collection of evidence that activity has picked up is Friday’s larger-than-expected jump for the European Commission’s Economic Confidence Index for the Eurozone, which was reported at a more-than-three-year high. Before this morning’s influx of reports, U.S. equity index futures were up by 0.3% to 0.4% and the Treasury curve had inched imperceptibly higher.


Pending Home Sales Fall Unexpectedly Back Below Pre-Pandemic Levels: Pending home sales fell unexpectedly in April, echoing other housing reports showing activity has slowed somewhat since a surge in the second half of 2020. The 4.4% drop last month was a considerable disappointment of the 0.4% gain economists expected, driven by declines in the Northeast, South, and West that drowned out a small improvement in the Midwest. After a notable softening early in 2021, the seasonally adjusted pending home sales index is now back below its pre-pandemic average from January and February of 2020. The NAR blamed the decline on “the lack of sufficient supply of affordable homes,” while noting, “The upper-end market is still moving sharply as inventory is more plentiful there.” The recent trend portends additional softening in existing home sales in the months ahead.

Kansas City Fed Survey Shows Strong Activity and Rising Prices Expected to Continue: The Kansas City Fed’s Manufacturing Index slipped more than expected in May from April’s all-time high of 31. The 5-point decline landed the index even with March’s 26, the second strongest level in records back to 2001. New orders rose while production and employment cooled. Although supplier delivery times were under less pressure, prices paid for raw materials jumped again to another record, consistent with trends in most other regional Fed surveys from early May. The outlook for activity over the next six months was encouraging, with orders and shipments expected to rise further and employment anticipated to remain strong. Notably, the index tracking business expectations for selling prices of finished products jumped to match its highest level in records since 1995.


Adjustments to Infrastructure Proposals Mark Small Steps from Both Sides, But Vast Gap Remains: After the President reduced his American Jobs Plan from $2.25 trillion to $1.7 trillion last Friday, a group of Republican Senators announced Thursday an increase in the size of their counterproposal from $568 billion to $928 billion. While the new proposed spending levels have brought Democrats and Republicans closer together, the gap between the two plans remains vast. According to reports, around $257 billion of the Republicans’ proposal represent new spending not already planned for, should current spending levels and programs continue. The initial response from Democrats knocked the size of the plan as too small, but the White House said it will meet with the Republican Senators sometime next week to discuss.

President’s Budget Proposal Expected to Lift Spending, Debt to Record Levels: President Biden is expected to unveil a $6 trillion budget proposal for fiscal 2022 today. The New York Times said, “While his plan estimates additional tax revenue down the line, the United States would run significant deficits … to finance his plans. …the federal budget deficit would hit $1.8 trillion in 2022, … debt held by the public would … [rise] to 117 percent of the size of the economy in 2031. By 2024, debt as a share of the economy would rise to its highest level in American history, eclipsing a World War II-era record.” The WSJ said the budget “will detail the proposals Mr. Biden has already laid out in his infrastructure and family-aid plans over the past few months” and “is unlikely to include other major policies beyond” those measures. The WSJ also said the budget “assumes that his proposed capital-gains tax rate increase took effect in late April, meaning that it would already be too late for high-income investors to realize gains at the lower tax rates if Congress agrees.”

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