Reinhart Week in Review by Madison Investments 3.15.2024


INFLATION

The Producer Price Index (PPI) accelerated to +0.6% from January, +0.3% ex-food & energy. Both were more than expected, and interest rates jumped on the news. While both were at or under 2% year-over-year, the year-over-year numbers were an increase from January.

Our Take: All indications from the Fed are that it will wait until it has greater confidence that inflation is heading toward its 2% goal before cutting rates. This PPI report will most likely push the Fed in the direction of waiting longer for more confirmation that inflation is not leveling out above the Fed’s target.

RETAIL SALES

Retail sales rose 0.6%, 0.3% excluding cars and gasoline. The headline number was below expectations, and sales growth is not keeping up with inflation. The February numbers were not the expected rebound from very weak January numbers, and so year-to-date retail sales are negative.

Our Take: The February sales numbers indicate that goods consumption is continuing its slowdown. It remains to be seen if services consumption will continue to offset this trend. Thus far U.S. consumers have supported continued growth even in the face of restrictive monetary policy. Even with the potential warning signs of a slowdown in activity, the Fed is unlikely to begin policy easing while inflation remains above target unless data indicate a much more significant slowdown and a likely uptick in unemployment.

JAPAN

Japanese trade unions reported that the average wage increase in 2024 pay deals is 5.3%, the biggest increase since the early 1990s. Many economists are stating that this is strong evidence that Japanese inflation is accelerating and that the Bank of Japan (BOJ) will need to hike to positive rates at their next meeting in April.

Our Take: Japan has had negative policy rates for just over 8 years, and the BOJ is the last major central bank to hold rates in negative territory following the ECB’s hikes in response to Eurozone inflation. The BOJ moving away from its extraordinary policy stance towards policy normalization is a welcome development. Failure to move by the BOJ would likely have significant effects on the exchange rates between the yen and other currencies.

MUNICIPALS

Many states are experiencing declining tax revenue. Thirty-seven states reported a decrease in tax collections in the second half of 2023 compared to the second half of 2022. According to Bloomberg, overall collections dropped 4.5% during the month of December compared to one year ago.

Our Take: Lower-than-expected tax collections along with inflationary pressures have led to a decrease in revenue for many states. As states prepare to tackle the budgeting process for the next fiscal year, certain states may be in a difficult position and could be forced to cut spending or make other changes to close budget gaps.

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The Producer Price Index (PPI) is a family of indexes that measures the average change over time in selling prices received by domestic producers of goods and services.