Stock Bulls Remain Optimistic As Manufacturing Inflation Slows, According to Data

As data indicates a deceleration in manufacturing inflation, stock market bulls remain exceedingly cautious but are slightly more bullish. The Producer Price Index increased by 11 percent year-over-year in April, which was higher than anticipated but a significant decrease from March's 11.5 percent increase. As producer prices lead consumer prices, the report is generally positive, although markets and the Fed will need to observe a few more months of decreases before pronouncing that inflation is actually moderating.

Inflation

Economists also caution that products inflation may be declining because consumer demand is shifting away from items and toward services, suggesting that high prices may be migrating from one sector of the economy to another. The most recent data indicates that prices for services are increasing at the quickest rate in 30 years, with airfare leading the way. Even if inflation has reached its top, the question is how long it will remain elevated.

Chairman of the Federal Reserve Jerome Powell cautioned Monday that the central bank cannot guarantee a "smooth landing" for the economy, citing the tight labor market and continued supply chain disruptions. Powell also emphasized that other "big events," including as Russia's war in Ukraine, are currently playing significant roles that are outside the Fed's control. Powell made the remarks after receiving Senate confirmation for a second four-year term.

The target inflation rate of the central bank is still "flexible +2 percent," but a number of officials have hinted that the new norm may be in the range of +2.5 percent to +3 percent. The Core PCE Prices Index, which stood at +5.2 percent in March, is one of the primary (but not the only) indicators used by the Fed to assess the rate of inflation. The April reading is expected to be released on May 27, a couple weeks before the Fed's next meeting on June 14-15.

Data to Monitor

Recent consumer data has sent mixed signals that are difficult to decipher. Since the beginning of the year, sentiment has largely declined, but consumer spending has showed no indications of slowing.

On Tuesday of the next week, April Retail Sales will provide an update on consumer spending. Next week, a flurry of new housing statistics will shed light on how significantly increased mortgage rates may be affecting the market. The May NAHB Housing Market Index is released on Tuesday, followed by April Housing Starts and April Existing Home Sales on Wednesday and Thursday, respectively.

Home Depot and Walmart will report earnings on Tuesday, followed by Cisco, Lowe's, Target, and TJX Companies on Wednesday; Applied Materials, Palo Alto Networks, and Ross Stores on Thursday; and Deere & Co. on Friday.