The latest information on inflation shows that prices remain high at the wholesale level before many price changes are passed on to consumers. The latest producer price index showed that inflation rose sharply in April. The report also includes a downward revision to March’s readings. The report is the first of two big inflation updates Wall Street is watching this week.
“Inflationary pressures in the U.S. economy remain significant and the momentum built over the past several years continues,” said Bill Adams, chief economist at Comerica Bank. “At the last minute, the Fed will likely view the April PPI report as another reason to delay rate cuts.”
Bond yields fell slightly. The yield on the 10-year U.S. Treasury note fell to 4.46% from 4.49% late Monday. The yield on the two-year Treasury note, which more accurately reflects expectations for Fed action, fell to 4.83% from 4.86%.
A bigger test for markets comes on Wednesday, when the U.S. releases its monthly update on consumer prices, or the inflation faced by households. Economists expect the consumer price index to fall by 3.4% in April from a year ago. Inflation is on track to rise by 2024, raising concerns that the Fed will have a hard time keeping inflation at the central bank’s 2% goal.
Investors are tempering expectations for the speed and frequency of rate cuts this year as inflation remains higher than expected. Traders are betting on one or two rate cuts this year, according to CME Group data.
Wall Street is still hoping the Fed can pull off a “soft landing” where high interest rates curb inflation without slowing the economy into recession. Although the economy remains strong, consumers may be showing signs of fatigue under the weight of stubborn inflation. Economists expect Wednesday’s retail sales report to show consumer spending softened in April, similar to previous months.
The latest earnings reports and company forecasts released by retailers also show that consumers are struggling. Low-income households are under particular strain.
Federal Reserve Chairman Jerome Powell reaffirmed on Tuesday during a panel discussion in Amsterdam that the central bank is unlikely to raise its key interest rate to address stubborn inflation. He also said confidence that inflation would ease was “not as high as it used to be” as price increases persisted in the first three months of the year.
The results were positive for the market, supporting major indexes’ gains in May after a difficult April. Most S&P 500 companies have completed their latest financial results, and overall earnings are up 5.3%.
Stock prices rose mainly in Europe and Asia.
The Chinese market fell after the United States planned to increase tariffs on Chinese imports.
