US data suggests only modest tariff impacts so far

We've had a really interesting set of US macro numbers this morning that in general suggest the Federal Reserve will be in a position to loosen monetary policy later in the year. April retail sales were broadly in line with expectations, rising 0.1% month-on-month (consensus 0.0%), but the “control group” is very soft at -0.2% MoM versus expectations of a 0.3% MoM gain. This measure excludes volatile items such as gasoline and autos and building materials and has a track record of better reflecting the underlying trend within consumer spending – remember retail sales only account for around 42% of total consumer spending.

Remember too that this is a nominal figure, so we need to deflate it to give us real growth as measured in GDP. That would imply perhaps a -0.3% or -0.4% MoM contraction. This would be a very poor outcome given that the market had expected a continuation of pre-emptive buying to get ahead of tariff induced price hikes. Electronic and furniture sales rose 0.3%, but most other components were flat or down. The only sector to see growth was eating out, which rose 1.2% MoM - note this is a category not particularly exposed to tariffs.

Meanwhile industrial production was softer than hoped in April with a flat outcome as manufacturing contracted 0.4% and utilities jumped 3.3%. The trend essentially remains a flat line.

Meanwhile PPI fell 0.5% MoM versus expectations of a 0.2% rise. That said, there was a big upward revision to the March data from -0.4% to 0.0% MoM. The core measure was also soft (-0.4% versus +0.3% expected), but again a huge upward revision. It either suggests a significant error in the calculation or they have had late data in that really swung things around in March. Nonetheless, the year-on-year rates have slowed markedly for headline PPI from 3.4% to 2.4% YoY and core drops from 4% to 3.1%. With last week’s CPI report also producing relatively benign 0.2% MoM outcomes there is little evidence, so far, that tariffs are inflationary and instead profit margins are being squeezed. But as Walmart suggested this morning, that is a situation that may not last long.

The PPI components that feed through into the core PCE deflator (the Fed's favoured inflation measure) suggest a 0.1% MoM print is possible for the core PCE. Portfolio management fees plunged 6.9% MoM while medical services were in general softer than the 0.5% MoM recorded in CPI. As such we still feel the Fed will be in a position to resume moving interest rates closer to neutral later in the year.