Inflation Remains Flat – Oil Prices Up

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World shares rose on Friday as investor appetite for riskier assets got a boost from softer U.S. inflation numbers. The MCSI All-Country World Index, which tracks shares in 47 countries, as up 0.3% and was set for its best week since March 9. Oil prices eased on Friday from multi-year highs on hopes alternative supplies could replace a looming drop in Iranian exports due to sanctions that Trump plans to reintroduce after pulling out of a global deal that limited Iran’s nuclear ambitions. Asian stocks were cheered by a further easing in tensions on the Korean peninsula. Political concerns do remain as trade tensions between China and the U.S. remain high and trade figures between the two countries are surfacing. In part, because of tensions between Trump and Iran, tensions in the Middle-East remain significant.


The S&P rose on Friday, helped by healthcare stocks after President Donald Trump blasted high drug prices but avoided taking aggressive steps to cut them. The Dow Jones Industrial Average rose 0.37% on Friday, while ending the week up 2.3%. The S&P 500 gained 0.7% on Friday and climbed 2.7% for the week. During Friday’s session, the Dow edged above the 100-day moving average for the first time since April 18, suggesting that the market may move higher.


Oil prices jumped to an almost three-year high on Thursday after President Trump pulled out of the international deal with Iran but calmed down at the end of the week. West Texas Intermediate settled in at $70.70 a barrel, while Brent Crude closed at $77.12 on Friday. Oil prices are caught in an almost perfect storm, a culmination of several geopolitical factors, including Venezuela’s election scheduled for May 20, which may prompt the U.S. to up sanctions against Maduro’s socialist regime amid falling production. Iraq has an election May 13, which may affect approval and licensing awards. OPEC comments may help support a market if they decide to ramp up production to fill a void left by Iran if necessary.


U.S. drillers added 13 oil and gas rigs last week to 1,045, up 160 from a year ago. U.S. oil production reached 10.703 million bpd in the week ending May 4th, the 11th increase in as many weeks. The EIA raised its US production forecast for 2018 to 10.7 million bpd and 11.9 million bpd in 2019. The combination of greater U.S. output and the higher dollar may help place a lid on oil prices over the next few months. There are concerns that oil could reach $100 if war broke out in the Middle East, resulting in sharply higher inflation and a likely global recession. The global economy can handle $70 a barrel but it does mean stronger inflation and weaker economic growth. Europe is vulnerable to slower economic growth and China will see the biggest impact on inflation. The U.S. will lose about half the 0.7% GDP increase projected by tax decrease.


Oil prices are likely to be volatile in coming weeks. The future path will be driven by geopolitical factors, including how Europe handles Iran and how far the U.S. goes with sanctions. Since Iranian oil won’t disappear from global markets until November, several countries have a say on whether they approve of Trump’s sanctions, including the EU, China and Russia. The situation is likely to be fluid. For now, the most likely path is that WTI will track in the $70 range, enough to slow global growth, but not enough to stop it.


Inflation was the focus for the week. The CPI came in at 0.2% and the core surprised on the downside at 0.1%.. Within the core CPI, new and used vehicle prices fell 0.9%. Excluding vehicle prices, the core CPI would have rose 0.2%.. The PPI rose only 0.1% in April. Service prices rose just 0.1% and goods prices were unchanged. Import prices rose 0.3%, boosted by a 1.3% gain in fuel prices. The soft track on inflation likely won’t change the Federal Reserve’s schedule for rate increases. They will likely stay on the quarter-point increase track per quarter. That means four increases this year, not three. The jump in oil prices won’t concern them too much if oil stays near $70 for WTI. The tax relief and federal government spending policies are a plus for the economy, but the trade and Iran deals are a negative for growth. Of course, if geopolitical events move oil prices significantly higher, it’s a new ball game, where everybody loses.


Next week will be busy for economic data. Retail sales for April will be released, as well as industrial production, business inventories and housing starts. The consumer sector started out the year on a weak note, but reversed in March. We expect a rebound in spending to continue in the second and third quarters, if there is a shortfall, the outlook for the remainder of the year may be downgraded. We look for manufacturing to strengthen after a weak March. The outlook for the factory sector is fairly robust, but hard data must match survey data to make the projections solidify. We expect the housing sector to build momentum and trend higher as the weather warms. The economy seems on solid ground, but uncertainty over trade and higher oil prices will take a toll. Uncertainty is a big negative for economic growth and the sooner trade issues are resolved, a brighter outlook will follow.

Latest Data

The U.S. Economy:

The NFIB small business index inched higher in April to 104.8, up from 104.7 in March. Details were generally weaker, as hiring plans fell and expectations for the economy to improve slipped. Capital expenditure plans did advance, but only reversed the prior month’s decline. The index remains elevated and small businesses are fairly confident about the economy and future business. Small business assessment of the labor market is consistent with an economy at, or beyond full employment. The share of respondents who say jobs are plentiful minus those who say jobs are hard to get averaged 22.9% in the first quarter, exceeding the peak o the last expansion and the best since 2000. This suggests that in order to attract workers, employers will have to raise wages.


The PPI for final demand rose just 0.1% in April, following a 0.3% increase in March. Final demand service prices rose 0.1%, while goods prices were unchanged. Excluding food and energy, the PPI rose 0.1% for the month. The 1.1% decline in final demand foods weighted on the index for final demand goods. Excluding food and energy, the final demand goods PPI rose 0.3% for a second consecutive month. The Fed will keep on its gradual track of raising rates. The Fed considers the economy to be a sweet spot, that is, decent growth, low unemployment and inflation near target. There is little reason to hurry as inflation, while positive, is still restrained.


The CPI came in weaker than expected in April, rising 0.2%, following the 0.1% decline in March. Core prices rose only 0.1%, following a 0.2% gain the preceding two months. On a year ago basis, the headline figure was up 2.4% and the core index 2.1%, respectively. Energy provided the biggest boost to the headline index, rising 1.4%, reversing some of the 2.8% decline in March. Food prices firmed in April, rising 0.3%. The weak inflation reading won’t sway the Fed as energy prices, caused in part by Trump’s pull-out of the Ian deal have increased significantly. Oil prices are a two-edged sword, feeing inflation and reducing consumer purchasing power. The Fed may signal three, rather than two more rate increases this year at the June meeting.


Import prices rose 0.3% in April, offsetting the 0.2% decline in March. Fuel and lubricant prices gained 1.3%, following a 2.4% decline in March. Petroleum prices did rise 1.6%. Nonfuel import prices increased 0.2%. Inflation reading came in soft in April. Tariffs could boost import prices. Not only the price of imported steel and aluminum are increasing but trade tensions remain high with China, which could provide a significant increase in the price of a variety of industrial and consumer commodities. There is still a great deal of uncertainty concerning trade, but the implications are negative.

Important Data Releases This Week

April retail sales will be released on Tuesday, May 15 at 8:30 AM EDT. Retail sales increased 0.6% in March, reversing a three-month string of declines. April sales will not likely get much of a boost from the auto sector, but we expect a solid 0.3% increase in total sales. Excluding autos, we project a decent 0.5% rise in sales. Consumer spending was soft in the first quarter, but we expect a decent rebound in Q2.


March business inventories will be released Tuesday, May 15 on at 10:00 AM EDT. Business inventory growth has been solid, rising 0.6% in February. Stockpiles are expected to rise 0.3% in March.


April industrial production will be released on Wednesday, May 16 at 8:30 AM EDT. Industrial production rose 0.5% in March, boosted by utility output. Manufacturing rose only 0.1%. We expect total IP to only rise 0.6% in April and manufacturing to increase 0.3%. The industrial economy is showing strength, but trade is a threat to future output.


April housing starts will be released on Wednesday, May 16 at 10:00 AM EDT. Housing starts increased 1.9% in March fueled by the multifamily sector. We expect starts to rise to 1.325 million and permits to rise to 1.350 million. The single-family sector will make a contribution this month.

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