May 15, 2023
Good morning,
Inflation does not indicate it is confidently marching lower. Friday’s surge in the University of Michigan’s initial May reading of long-term inflation expectations jumps the odds of a June rate hike. Even if Fed policymakers really don’t want to raise rates again, they won’t ignore this alarming data point. In the past, Fed Chair Jerome Powell has said it will be more costly for the Fed to act if it waits until inflation expectations have already been unanchored. However, there is still a lot of what of water to run under the bridge before the next Fed decision next month.
Let’s look at the week ahead – This week’s data will likely show more economic weakness, emboldening the committee’s dovish voices even though inflation data have failed to reassure. Retail sales (Tues.) will likely show that despite April’s blowout auto sales, most other categories of demand were soft. Data will likely show that manufacturing activity has continued declining (Empire Manufacturing Survey, Mon.; Industrial Production, Tues.; Philly Fed Business Outlook, Thurs.), and producers are wary of holding excess inventory (Business Inventories, Tues.), anticipating that demand will slip in the second half of the year.
Be well,
Mike