Vital Statistics:
Stocks are flattish on no real news. Bonds and MBS are up.
The S&P Composite Flash PMI dropped to a 16 month low driven by more pessimistic expectations about the future. The survey was conducted from April 9 – April 22, so it includes the tariff tantrum as well as the suspension. Manufacturing activity hit a 2 month high, while services declined. Particularly ominous was the increase in prices for manufacturing.
The increase in prices for manufacturing was attributed to tariffs, rising import costs (i.e. weaker dollar) and increased labor costs. Prices rose the most since August of 2022 as suppliers raised prices in anticipation of tariffs. We will see if these prices stick if tariffs don’t end up getting imposed or are smaller than first feared.
Employment cooled from the rapid pace we saw at the beginning of the year. While services employment increased at a modest pace, manufacturing jobs were cut.
“The early flash PMI data for April point to a marked slowing of business activity growth at the start of the second quarter, accompanied by a slump in optimism about the outlook. At the same time, price pressures intensified, creating a headache for a central bank which is coming under increasing pressure to shore up a weakening economy just as inflation looks set to rise.
“Confidence about business conditions in the year ahead has meanwhile deteriorated sharply, worsening among manufacturers and service providers alike, largely thanks to growing concerns about the impact of recent government policy announcements. Tariffs are meanwhile being cited as the key cause of higher prices, though labor costs are also reportedly continuing to rise, causing companies to hike their selling prices at a pace not seen for over a year. In manufacturing, the rate of price increase is the steepest for nearly two and-a-half years. These higher prices will inevitably feed through to higher consumer inflation, potentially limiting the scope for the Federal Reserve to reduce interest rates at a time when a slowing economy looks in need of a boost.”
The point about tariffs and the Federal Reserve is important, but it is also complicated. If tariffs cause a one-time boost in prices but then prices increase at 2% at the new, higher level then it won’t affect policy all that much. The Fed can still gradually reduce its pace of tightening and approach neutrality by the end of the year.
However if tariffs cause a jump in price levels, which then sets off a self-reinforcing loop then the Fed will have a new inflation problem to deal with and will probably hold rates here until we see an uptick in unemployment to 5%.
FWIW, it is important to remember that shelter inflation was the big driver of inflation during 2021-2022, and that is highly unlikely to repeat. Second the labor market is weakening which means workers don’t necessarily have the negotiating power to demand raises. Finally, energy prices are declining. We could see an increase regardless but the situation today is vastly different than 2021.
New home sales rose 6% year-over-year to a seasonally-adjusted annual pace of 724,000 units. At the end of March, there were 503,000 new homes for sale, an which represents about 8 months worth of inventory. The median sale price fell 7.5% YOY to $403,600, as starter homes are popular and luxury is languishing on the market.
