Contrarian Alert: Is This Week’s Data Going to Change the Inflationary Trend?

PPI, CPI, and Retail Sales Are Likely to Move the Markets. Here's What to Know.

I usually post a new trade on Mondays. But given this week’s inflation data, I am holding onto to my potential new picks until the PPI, CPI, and Retail Sales numbers are released.  Instead, I’m offering an analysis of what the data may reveal.

Will This Week’s Numbers Tips the Inflationary Boat?

Contrarian thought is often useful when trading stocks, which is why I’m asking whether this week’s CPI, which will measure inflation in April will come in below expectations.  I’m basing the notion on the fact that suddenly, consumer surveys are pointing to increasing levels of pessimism from the public.

Of course, who can blame anyone for being fearful of inflation, especially when last month’s numbers suggested that the recent slowing in its rise is reversing and that prices are about to accelerate.  But where’s what I’m thinking.

What if last month’s Inflation numbers were the top?

To be honest, I’m not betting too much on the fact that last month’s numbers were the top of the inflationary spiral. My own grocery tab hasn’t really changed much over the last few weeks, although gasoline prices have rolled over.

But there is some data which is worth considering and which may have an effect on the CPI number.  If that effect were significant, it could push bond yields lower and would likely push stocks higher.

To ignore this possibility would be folly.

Recent Data Suggests a Positive Surprise is Plausible

Last week’s consumer confidence number collapsed, and inflationary expectations rocketed.  This morning, the Federal Reserve Bank of New York’s April Survey of Consumer Expectations clocked in at 3.3% year over year growth, rising from the prior 3%, while rising from 2.6 to 2.8% over the next five years.

Combined, the two surveys suggest that consumers are no longer expecting a decline in inflation anytime soon.  It sort of feels as if the consumer is now capitulating, a development which is similar to what happens at stock market bottoms when a full blown panic hits those investors who’ve refused to sell on the way down.  It’s that feeling that there is no end to inflation which is now clearly being expressed, which in turn is why it’s worth considering that maybe, and I mean MAYBE, CPI may come in below expectations.

The consensus is for a 3.4% year over year growth rate.  Meanwhile, the dark horse number for the week is likely to be Retail Sales, which are expected to grow at a 4.4% year over year rate. 

It will be interesting to see what happens if retail sales come in below expectations, especially if consumer prices rise.  That’s because last week’s Consumer Credit report from the Fed showed that credit card usage by consumers flattened out significantly.  That would suggest that consumers are essentially walking away from retailers and that something big is unfolding.

That’s a lot to consider, and until proven otherwise is wildly speculative, although plausible at some point.

Currently, all we can say is that the decline in consumer confidence, the rise in inflationary expectations, and the decline in the growth of consumer credit paint a picture of what could be a slowing in consumer spending patterns which may be reflected in CPI.  In other words, at some point a drop in consumer demand for non-essential products will lead to lower asking prices by retailers which will work through the system and eventually show up in CPI.

It may not happen this month.  But it certainly could, especially given the sudden reversals in Non-Farm Payrolls and credit card usage.

Bonds Are Hopeful

The bond market is hoping for a less than expected growth rate CPI as that would mark a decreasing rate of inflationary growth and would increase the odds of a Federal Reserve interest rate cut sooner rather than later.

Fed Chairman Powell will speak on Tuesday, after the release of the PPI data, which may set the stage for a surprise in CPI.  His remarks may move the markets, especially if he hints that the Fed is seeing a welcome and sudden reversal in inflation.

The U.S. Ten Year Note Yield (TNX) is trading in a narrow range ahead of the numbers, reflecting the bond market’s hopes for better than expected numbers.  TNX is hovering just below the 4.5% yield. Good news on PPI and CPI will likely push TNX lower.  A move below the 200-day moving average (4.329) will likely be a bullish development for stocks, especially homebuilders, infrastructure, and REITs.

I just posted a new poll querying your opinion on what to expect with CPI.  Let me know what you think by voting and commenting.

Bottom Line

This week’s CPI, along with PPI and Retail Sales will likely be market moving numbers.  If combined, they paint a picture of a meaningful change in consumer behavior, such as a marked slowing, it could change the entire market dynamic in bonds and stocks.

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