ETFs
Inflation, retail trade and household debt
Economic indicators provide insight into the overall health and performance of an economy. They are essential tools for policymakers, advisors, investors and businesses to make informed decisions regarding business strategies and financial markets. In the week ending May 16, the SPDR S&P 500 ETF Trust (TO SPY A) increased by 1.64% while the Invesco S&P 500® Equal Weight ETF (RRSP A-) is up 1.18%. Inflation has been a constant topic of conversation for the past few years due to its role in the Fed’s interest rate policy and its ability to quickly influence financial markets.
The Fed has been cautious about making changes to monetary policy, emphasizing the need to have confidence that inflation is moving closer to its 2% target. This article seeks to summarize three important economic indicators from the past week to provide insight into the latest trends in inflation and consumer spending.
Consumer price index
Inflation finally showed signs of slowing last month after several higher-than-expected readings to start the year. THE Consumer price index increased by 3.4% in April, compared to 3.5% in March and in line with expectations. Compared to the previous month, consumer prices increased by 0.3%, which was lower than the expected growth of 0.4%. The main driver of growth in April was the continued rise in housing costs as well as the increase in gasoline prices. Together, these two elements contributed to more than 70% of the overall increase.
Core inflation, which excludes food and energy prices, returned to its lowest level since April 2021. Core CPI fell to 3.6% on an annual basis, as foreseen. Additionally, core prices increased by 0.3% from March, as expected.
The question remains when the Fed will start lowering rates. Although the Fed is still expected to hold rates steady through its upcoming meetings, the latest CPI numbers support the idea of a rate cut later this year. At the time of writing, the CME Fed Monitoring Tool indicates a 91% probability for rate stability at the June meeting and a 69% probability for the July meeting. The Fed CME monitoring tool currently indicates a 51% chance that the first rate cut will occur in September.
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Retail sales
U.S. consumers appear to continue to become more cautious as their spending took an unexpected pause last month. Retail sales remained stable in April, below the expected growth of 0.4%. In addition, growth for the month of March was revised downward. Consumer spending increased in a handful of sectors, including gas stations (3.1%), clothing stores (1.6%), electronics and appliance stores (1.5%) and food and beverage stores (0.8%). At the same time, most other sectors saw their spending decline.
Core retail sales (excluding automobiles) rose 0.2% from March, as expected. Finally, controlled purchases, considered an even more “central” element of retail sales, decreased by 0.3% compared to the previous month. Although this series generally does not get as much attention as the headline and fundamental numbers, controlled purchases are a more consistent and reliable reading of the economy because they eliminate many volatile components.
Overall, consumer spending is off to a slower start than expected for 2024 as Americans continue to struggle with inflation and high rates. The latest retail sales data are unlikely to cause a major change in the Fed’s interest rate policy, but they reinforce the idea that rate cuts are not completely off the table for this year.
Retail sales will impact interest in the SPDR S&P Retail ETF (XRT B+), VanEck Retail ETF (RTH A-), Amplify Online Retail ETF (I BUY C+), and ProShares Online Retail ETF (ONLN B).
Household debt and credit
In the last quarterly household debt and credit According to a report released by the New York Fed, we saw a $184 billion increase in household debt, reaching a record $17.69 trillion in the first quarter of this year. The latest data represents an increase of 1.09% from the fourth quarter’s debt level, which stood at $17.5 trillion. The first quarter increase was largely driven by mortgage and auto loan balances, both of which reached new all-time highs. Specifically, mortgage balances increased by $190 billion (1.55%) to $12.442 billion and auto loan balances increased by $9 billion (0.56%) to $1.616 billion. of dollars. Meanwhile, credit card and student loan balances both declined in the first quarter but remain high. This comprehensive report serves as an indicator of the financial status of U.S. households, providing insight into their economic well-being.
Economic indicators and the week ahead
This week we will receive data on a few additional housing indicators. The National Association of Realtors will release April data on existing home sales on Wednesday, followed on Thursday by the Census Bureau releasing data on new home sales. These real estate market indicators will impact homebuilders and residential real estate ETFs such as iShares US Home Construction ETF (ITB A), SPDR S&P Home Builders ETF (XHB A+), and iShares Residential and Multi-Sector Real Estate ETF (GROUND A-). Existing home sales are expected to decline slightly to a seasonally adjusted annual rate of 4.18 million units. New home sales are expected to fall at a seasonally adjusted annual rate of 680,000 units.
Also this week we will receive the latest consumer confidence data with the University of Michigan Consumer Confidence Index. On Friday, this month’s final report, which could impact interest in the Consumer Discretionary Select Sector SPDR ETF (XLY A), is expected to remain at May’s preliminary level of 67.4.
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