Some Bad News on Good Friday


Markets are closed for Good Friday, but it’s not a federal holiday so the U.S. Census Bureau and Bureau of Labor Statistics are busy issuing data. They probably should have taken the day off.

The consumer price index fell by a seasonally adjusted 0.3% in March, the first time it’s dropped in 13 months. Economists polled by Econoday expected it to be steady, so that was a huge, shocking decline. Some people blamed a 6.2% drop in gasoline prices, but the core rate, which excludes food and energy, also  fell by an unexpected 0.1%.

And retail sales fell by 0.2% in March, powered largely by the third consecutive monthly decline in auto sales. Also, February retail sales were revised sharply lower to -0.3%, making February and March the worst two-month stretch for retail sales in two years.

What does this mean and how will it affect markets?

First of all,  as Econoday wrote, “first-quarter consumer spending is in trouble”—and not just from the so-called “retail apocalypse.” Consumers appear to be cutting back, especially on big-ticket items.

The “Trump bump,” which buoyed confidence after the election, is fading along with the stock market as prospects for tax reform and other allegedly “pro-growth” policies from the new administration look more remote. That consumer slowdown may keep GDP growth in the low to mid-2% range, not the 3% or 4% economic fantasists projected when Trump came to town.

Second, because consumers are pulling back, inflation is cooling down. The annual inflation rate has fallen to 2.4%, from 2.7% last month. That makes it a lot harder for the Federal Reserve to claim it must raise the federal funds rate to get “ahead of the curve” in fighting inflation.

Thus far, there’s little real inflation for the Fed to fight. If it continues at this pace, the Fed won’t go beyond its implicit targets of two more increases in short-term rates and perhaps some reduction in its balance sheet this year.

Bond markets already have responded:  Yields on the ten-year Treasury note have tumbled to 2.23% from a peak of 2.6% just six weeks ago. Investors have clearly moved money to bonds as they realize happy days aren’t here again just yet.

And municipal bonds, which suffered an investor exodus after Election Day on the belief tax reform would make their tax-exempt status less attractive, have mounted a quiet comeback.

With the Fed pretty much set in its direction and tax reform pushed back to the end of the year at the earliest, stocks will need strong earnings to advance. And since we’re in earnings season, now’s the time.

Happy Easter or Passover to those who observe them, and happy spring to everyone else.


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