The reverse correlation between the perceived increased likelihood of one or more interest rate hikes by the Federal Reserve this calendar year and weakness in equity markets remains in channel. Yesterday, investors greeted stronger than expected CPI data for the month of April with concern. That concern however is largely unwarranted for the time being.
The April CPI reading, released Tuesday, was 0.4%. That was higher than consensus expectations calling for 0.3%. However, the CPI on a year over year basis remains only 1.1%. Less food and energy the CPI reading on a year over year basis is 2.1% or 0.1% lower. Driving the uptick in the April CPI reading was the reversal seen in crude prices over the past month. Crude rally of nearly 10% in the month provided the lift to CPI that explains the hotter than expected data. Though commodities have clearly outperformed equities this year to date, it is very likely that crude's resurgence will run into a wall - even if supplies continue to tighten in the very near term because additional US domestic production is once again becoming economic.
Weak pricing power in the retail apparel sector, coupled with a year over year decline in crude prices of nearly 10% and a leveling off in home prices (nationally) will continue to keep the CPI, on a moving forward basis, well contained and very likely below 2% up until mid-summer - after the June FOMC Announcement.
The larger than expected jump in housing starts of 1.172M, (annualized) in April, that was released yesterday spoke to a response from builders to pent up demand and some seasonal strength in the industry. Certainly a welcome development for the broader economy which will provide further ground work for additional employment gains in coming months.
Additionally, there is little incentive for the Federal Reserve to raise rates before the upcoming Brexit referendum. So investors can breath easy, the Fed is not going to raise sooner rather than later, though all bets are off after mid-summer.