Economic Data

Inflation Eased…For Now

• The Bureau of Labor Statistics reported that the consumer price index (CPI) rose 2.3% in April from a year earlier, the lowest annual rate since 2021 and ever-so-close to the Fed’s 2% target inflation rate (albeit the Fed tracks a slightly different index), Recent progress, however, may reverse course in the near-term...
• Core CPI, which excludes volatile food and energy prices, advanced at a higher 2.8% rate. Shelter inflation continued to remain firm, and the impact of tariffs started to creep in as prices for vehicle parts and equipment, household furnishings and appliances, and computer hardware all jumped significantly during the month.[6]
• Inflation reports moving forward will add clarity regarding the true impact of tariffs on consumer prices.

The Almighty American Consumer

• April retail sales edged up 0.1% for the month, slowing significantly from a 1.7% surge in March as consumers pulled forward purchases to beat tariffs, particularly for autos.[7] Private consumption accounts for over two-thirds of US gross domestic product, and WP is wary of tighter purse strings due to economic handwringing on Main Street, which leads us to…

Consumer Sentiment Remains Dour

• The University of Michigan’s consumer sentiment index fell to 50.8 from April’s reading of 52.2. This marked the second lowest reading since 1978, just shy of the 50-mark recorded during June 2022, when inflation last peaked.[8]
• Consumer inflation expectations for the coming year jumped to 7.3% in May from 6.5% in April. Five-year inflation expectations ticked up to 4.6% from 4.4%.[9] This stands in stark contrast to the bond market’s pricing of inflation, which we measure at ~3% for the next year and 2.4% annually over the next five years based on breakeven rates.[10]
• While consumer sentiment is considered “soft data,” the Fed pays attention because they do not want inflation expectations to become “de-anchored” from their 2% target, which may risk fear of higher prices developing into a self-fulfilling prophecy. If businesses and consumers believe prices will keep rising, they could take actions that ensure that outcome by pulling forward expenditures.

Chronicle of Stagflation Foretold?

• Japan’s economy shrank by 0.7% on an annualized basis in Q1 as exports declined sharply, likely affected by US tariffs.[11] The world’s fifth largest economy currently faces the same 10% baseline tariff that President Trump has imposed on every other country but is also hit particularly hard by the separate 25% levies on autos and steel and aluminum products.
• Meanwhile, core inflation in the country, which strips out prices for fresh food, accelerated to 3.5% in April.[12]
• The Bank of Japan, for its part, has indicated their belief that a bilateral trade slowdown with the US will exert downward pressure on both GDP growth and price levels, but intends to continue raising interest rates in an attempt to bring inflation down closer to its 2% target.[13]

Stay Put

• The National Association of Realtors (NAR) reported that US existing-home sales fell by 0.5% in April from March to a seasonally adjusted annual rate of 4 million units, the slowest sales pace for any April since the housing crisis in 2009. Sales fell 2% from the same month a year earlier. Affordability is a major issue, with many homeowners locked into rock-bottom mortgage rates refinanced during the pandemic era, and current mortgage rates of ~7% discouraging would-be first-time buyers. Transaction activity is therefore suffering, but prices are holding up. The national median existing-home price in April was $414,000, up 1.8% from a year earlier and the highest median home price for any April, NAR said.[14]
• Sales of newly built homes were strong last month, but existing-home sales traditionally account for ~90% of the overall market.

Tax Cuts & Deregulation

• Moody’s, a bond rating agency, crashed the stock market party late on Friday, May 16, by becoming the last of the three major ratings firms to downgrade US fiscal debt from the highest level.[15] The major concern is that the “One Big, Beautiful Bill” may worsen the current budget deficit from an already obscene 6%. Such deficit spending may cause the Treasury to increase debt issuance while simultaneously rendering US bonds less attractive to foreign buyers, a situation that may send longer-term interest rates higher.
• Concerningly, Moody’s now expects the federal deficit to rise to nearly 9% of GDP this year, up from 6.4% in 2024.[16] When downgrading the US to Aa1 from Aaa, the rating agency noted the “increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.”[17]
• Next week’s issue of WP Weekly Insights will include a deeper analysis of the OBBB, and why it, in its current state, does very little to quell the justified anxiety surrounding US fiscal recklessness.

Corporate Earnings

• Walmart reported strong first quarter results but warned that it would be passing along tariff-related cost increases to shoppers. "We're positioned to manage the cost pressure from tariffs as well or better than anyone," CEO Doug McMillon told investors, “But even at the reduced levels, the higher tariffs will result in higher prices."[18]
• Home Depot, on the other hand, acted as Walmart’s mirror image, missing earnings estimates but insisting that they would keep prices unchanged in the face of tariff policy. “We don’t see broad-based price increases for our customers at all going forward,” said Billy Bastek, executive vice president of merchandising.[19]Lowe’s posted an earnings beat and also said they intend to keep prices competitive.[20]
• 96% of S&P 500 companies have reported Q1 results through Friday, May 23. Of those, 78% reported a positive EPS surprise and 63% a positive revenue surprise. Earnings growth is on track for 12.9% versus estimated growth in the low-7% range at the outset of earnings season. American Exceptionalism appears to be alive and well, but Q2 and beyond will provide sterner tests as US trade policy evolves.[21]

In Other News…

Pakistan and India

• The nuclear-armed rivals agreed to a President Trump-brokered ceasefire on May 10 following four days of conflict, mostly involving airstrikes by India on Pakistani targets just over their shared border. Tensions ignited after a terrorism incident in the disputed Kashmir region last month.

Trump’s Middle East Parade

• President Trump took a 4-day whistle-stop tour of the oil-rich Gulf Nations and didn’t come home empty handed. Saudi Arabia committed to investing $600 billion stateside, Qatar agreed to buy 210 Boeings (a record for a single order) and also to “lend” an existing one for Trump to utilize as Air Force One for the remainder of his term, and the UAE appears to have reached a preliminary agreement to import half a million Nvidia microchips.[22]

The Week Ahead 5/16

• The Fed will give us a peek under the hood when they release the minutes of their May monetary policy meeting, when they left interest rates unchanged but highlighted the uncertain effect that tariffs may have on consumer prices.
• With earnings season effectively over, a few heavy hitters remain. Nvidia (the heaviest of all), Costco, and Salesforce will be reporting Q1 results throughout the week.
• More inflation data arrives on Friday, May 30, when the Bureau of Economic Analysis (BEA) releases the personal consumption expenditures (PCE) price index, the Fed’s preferred gauge, for the month of April. Core PCE, which strips out volatile food and energy prices, is expected to fall to 2.5% on a year-on-year basis from 2.6% in March, inching toward the Fed’s 2% target as tariffs loom.
• The BEA will be busy as they will also provide an updated estimate of Q1 GDP. The first reading released a month ago indicated a slowdown of 0.3% on a jump in imports to front run tariffs. WP wrote at the time that we wouldn’t be surprised to find an upward revision, so we’ll see.
• The S&P CoreLogic Case-Shiller Indices will provide what WP considers to be the most comprehensive overview of monthly home prices.

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Economic and Index Definitions

Big Tech: The most dominant and largest technology companies in their respective sectors.

Bloomberg Municipal Bond Index: The Bloomberg U.S. Municipal Index covers the USD-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds.

Bloomberg US Agg Bond: The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

Breakeven Rate: The difference in yield between the nominal debt and  inflation-protected debt of the same maturity. If the breakeven rate is positive it suggests traders are betting the economy may face inflation in the near future.

Budget Deficit: Occurs when government spending exceeds government revenue during a defined period.

Bureau of Economic Analysis: A division of the US Department of Commerce responsible for producing economic statistics. These statistics are used by government, businesses, researchers, and the public to track and understand the performance of the U.S. economy. The BEA's data helps inform economic policy decisions and provides insights into various aspects of the economy.

Bureau of Labor Statistics: A US government agency that gathers, analyzes, and publishes data on labor market activity, working conditions, and prices in the economy. It serves as a primary source of information for the public, employers, researchers, and government agencies.

CBOE Volatility Index (VIX): A real-time market index representing the market’s expectations for volatility over the coming 30 days. Investors use the VIX to measure the level of risk, fear, or stress in the market when making investment decisions.

Consumer Spending: Consumer spending refers to the total amount of money individuals and households spend on goods and services. It's a crucial component of economic growth and a major driver of demand.

Core Inflation: An inflationary measure that leaves out energy and food, focusing only on items that have predictable price movements.

Earnings per Share (EPS): A financial metric that represents the portion of a company's profit allocated to each outstanding share of common stock. It's a key indicator of a company's profitability and is used to gauge the value of its stock. EPS is calculated by dividing the company's net income (profit) by the number of outstanding shares of common stock.

EPS Surprise: The difference between a company's reported earnings per share (EPS) and the expected EPS, which is usually a consensus estimate from Wall Street analysts. A positive earnings surprise means the company's actual EPS is higher than expected, while a negative earnings surprise means the actual EPS is lower than expected.

Exchange Traded Fund (ETF): An exchange-traded fund (ETF) is an investment fund that holds multiple underlying assets and can be bought and sold on an exchange, much like an individual stock. ETFs can be structured to track anything from the price of a commodity to a large and diverse collection of stocks.

Existing Home Sales: This concept tracks the sales of previously owned homes during the reference period. Total existing home sales include single-family homes, townhomes, condominiums and co-ops. All sales are based on closings from Multiple Listing Services. Foreclosed homes are only counted in the inventory if the bank is working with a realtor. Foreclosed homes that sell via auction (or other closings outside of the Multiple Listing Services) are not included.

Federal Funds Rate: The interest rate at which banks lend reserve balances to each other overnight. It's essentially the rate banks charge each other for short-term loans to meet their reserve requirements. The Federal Reserve sets a target range for this rate, which influences a wide range of other interest rates in the economy.

Federal Reserve (Fed): The Federal Reserve System is the central banking system of the United States of America.

Forward Price-to-Earnings (P/E) Ratio: A valuation metric that uses a company's projected earnings for the next 12 months to determine how much investors are paying for each dollar of future earnings. It's calculated by dividing the current stock price by the estimated earnings per share (EPS) for the upcoming year.

Gross Domestic Product (GDP): The total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.

Guidance: A company's own best estimates to shareholders of its upcoming earnings, it is usually published immediately after earnings for the past quarter and is the focus of discussion at a meeting between company executives and analysts. Earnings guidance is used by investors and analysts to adjust their expectations for a company's share price.

ICE US Dollar Index: The U.S. Dollar Index is a geometrically averaged calculation of six currencies weighted against the U.S. dollar: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.  The U.S. Dollar Index originally was developed by the U.S. Federal Reserve in 1973 to provide an external bilateral trade-weighted average value of the U.S. dollar as it freely floated against global currencies.

Magnificent Seven: A group of seven mega-cap technology stocks that have dominated recent market returns and are considered leaders in the tech industry. These companies include Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Nvidia, and Tesla.

MSCI EAFE: The MSCI EAFE Index is a free-float weighted equity index. The index was developed with a base value of 100 as of December 31, 1969. The MSCI EAFE region covers DM countries in Europe, Australasia, Israel, and the Far East.

Nasdaq Composite Index: A market capitalization-weighted index of more than 2,500 stocks listed on the Nasdaq stock exchange. It is a broad index that is heavily weighted toward the technology sector. The index is composed of both domestic and international companies. The highly watched index is a staple of financial markets reports.

Personal Consumption Expenditures (PCE) Price Index: A measure of inflation that tracks the change in prices of goods and services purchased by consumers in the United States. It's considered a broader measure of inflation than the Consumer Price Index (CPI) because it includes more types of consumer spending and broader coverage of goods and services.

Price-to-Earnings (P/E) Ratio: A measure of a company's share price relative to its earnings per share (EPS). Often called the price or earnings multiple, the P/E ratio helps assess the relative value of a company's stock. It is utilized to compare a company's valuation against its historical performance, against other firms within its industry, and/or the overall market.

Reciprocal Tariff: A tax or trade restriction imposed by one country on another in response to similar actions taken by that country. It aims to create balance in trade by mirroring the tariff levels or trade restrictions imposed by another nation. Essentially, if one country raises tariffs on goods from another, the affected country might respond by imposing its own tariffs on imports from the first country.

Retail Sales: Retail sales (also referred to as retail trade) tracks the resale of new and used goods to the general public, for personal or household consumption. This concept is based on the value of goods sold.

Revenue Surprise: The difference between a company's reported revenue (sales) and the expected revenue, which is usually a consensus estimate from Wall Street analysts. A positive revenue surprise means the company's actual revenue is higher than expected, while a negative revenue surprise means the actual revenue is lower than expected.

Roundhill Magnificent Seven ETF (MAGS): An ETF offers equal weight exposure to the “Magnificent Seven” stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, andTesla.

Russell 2500: The Russell 2500 is a market-cap-weighted index that includes the smallest 2,500 companies covered in the broad-based Russell 3000 sphere of United States-based listed equities. All 2,500 of the companies included in the Index cover the small- and mid-cap market capitalizations.

S&P 500: The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Stagflation: An economic situation characterized by both high inflation and slow economic growth, often accompanied by high unemployment. It's essentially a combination of "stagnation" (slow or no economic growth) and "inflation" (rising prices).

Tariff: A tax imposed by a government on imported goods, typically calculated as a percentage of the value of the goods. It's a trade barrier that increases the price of imported goods, potentially protecting domestic industries and generating revenue for the government. 

Treasury Department: The Treasury Department is a government agency responsible for managing federal finances, collecting taxes, and managing currency, government accounts, and public debt. It also enforces finance and tax laws. In essence, it's the government's financial arm, handling both revenue and spending.

University of Michigan Consumer Sentiment Index (CSI): A monthly survey that measures how consumers feel about the economy, their personal finances, and their expectations for the future. It's essentially a gauge of consumer confidence and is used as an indicator of potential future spending and economic activity.

Yield to Maturity (YTM): The internal rate of return (IRR) that equates all future cash flows of a bond to its current price. YTM assumes the bond is held until maturity and that an investor can reinvest at the same yield.