This Rally Is Different

It's Being Led By The Wrong Sectors

The markets got a mixed bag of inflation data last week. Both the CPI and core CPI readings were up 0.3% month-over-month, which met expectations on both counts, but producer price inflation hit 0.5%, well above estimates of a 0.3% increase. We continue to see no real good evidence that would suggest the Fed should be considering rate cuts here, but the market is back to pricing in a pair of them before year-end. The sequence of inflation could be the more concerning thing here. Rises in producer prices often lead to corresponding changes in consumer prices down the road as manufacturers try to pass along their higher costs to the end consumer. Inflation is still running at a short-term annualized rate of 3-4% and there’s a chance that this rate heads higher based on the PPI and the upcoming summer travel season. It kind of amazes me that investors remain this resilient to the idea of rate cuts with the data mostly suggesting otherwise. GDP growth and unemployment may be in the very early stages of indicating a slowdown, but not enough that would suggest imminent recession risk. If we see rapid negative changes in those figures, then the calculus changes, but we’re not there yet.

Along those lines, U.S. retail sales suggest that we might finally be seeing that slowdown in consumer activity that’s been telegraphed for a while. April sales were flat (vs. a forecast of a 0.4% gain), which (save for a post-Christmas decline that was expected) was easily the worst number since Q4 of last year. Home Depot earnings also missed, citing slower foot traffic & spending on discretionary projects and echoing similar sentiments from other retailers. We already know that consumer credit card debt is well over $1 trillion, the use of “buy now, pay later” schemes is soaring and credit card default rates are at their highest level since 2012. The consumer is, quite simply, perilously close to getting completely tapped out. Retailers have been warning about this for several quarters and it might be starting to show up in the numbers. This could be a part of the reason why defensive assets have been controlling the financial markets over the past several weeks.