'Elevated caution' is 'warranted' for consumers: Economist

The Consumer Price Index (CPI) data for April fell mostly in line with expectations, sparking further debate about how the Federal Reserve will shape its future monetary policy. In response to the CPI reading, US Equities (^GSPC, ^DJI, ^IXIC) have begun to rise.

Edward Jones Senior Investment Strategist Angelo Kourkafas and Interactive Brokers Senior Economist José Torres join Market Domination to discuss how the recent CPI data will impact the Fed and the broader markets.

Kourkafas believes the economic data will move the Fed to cut rates: "We think 1 to 2 rate cuts are realistic. I think today was the combo of Fed-friendly data. Looking at both the CPI and retail sales that validate the Fed's stance of not considering further rate hikes from here, but signaling patience. Though the market that the number didn't deviate very much from expectations, I think markets are breathing a sigh of relief that disinflation continues."

Torres comments on the strength of the consumer during this cycle: "Consumer erraticness [sic] has been part of this cycle since for the last two and a half years, roughly. So I'm not ready to call the consumer quits just yet. They might come back quite strongly the next month. However, savings are really depleted. Sentiment is down. Consumers are not only concerned over higher prices and lofty interest rates, they're also now fearing their job stability as well. So I do think that there's elevated caution that's warranted this time around."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Nicholas Jacobino

Video transcript

The S and P 500 NASDAQ in record territory after a soft reading on inflation, the consumer price index rising 0.3% in April over the previous month and 3.4% from a year ago.

We also saw retail sales coming in flat as the consumer showing signs of slowing last month to break it all down.

We've got Jose Torres interactive Brokers, senior economist, as well as Edward Jones, senior investment strategist, Angelo Kirkus, uh Jose, let's start with you here.

Um And we'll start Jose with that CP I print, what did you make of it, Jose and importantly, what do you think Jay Powell made of it?

Thanks for having me, Josh.

Well, I think that it was a cool reading and the markets loving it.

I think that that is liking it too, but an important consideration is that most components actually inflected higher, really got bailed out by new and used automobiles within this print.

Now, the good news is that commodity prices are down big this month and we're probably going to get the first favorable inflation report for the year month.

However, from January through April so far every single inflation print has been quite above the fed's annualized 2% target and the standard there is roughly 17 bits month over month.

I'm concerned that services disinflation hasn't occurred all of last year or this year.

I think goods and commodities are starting to work their way lower but services remain the problem.

So if services remain the problem, then Angelo and as I mentioned, we are seeing the market start to still price in maybe some interest rate cuts by the end of the year.

You know, obviously that number has been swinging quite a lot as we've gotten each new economic data point.

But do you think it's likely given this latest information?

Yes, we think 1 to 2 rate cuts are realistic.

I think today was the combo of fed friendly data looking at both the CP I and retail sales that validate the feds stance of not considering further rate hikes from here.

But signaling patience, if the market that the number was not, didn't deviate very much from expectations.

I think markets are breathing a sigh of relief that this inflation continues, the trend remains lower even though we are walking down a bumpy path if you will.

Uh Jose, let me bring you back here because Angelo did mention retail sales.

I want your take on that as well.

April retail sales uh unchanged, weaker than consensus.

Uh The team at Pantheon Economics Jose saying uh this was in their words, a clear signal of weakening consumption.

Is that how you saw it, Jose?

Well, Josh, since 2022 we've seen consumer spending in some months really fall off a cliff only to recover quite strongly consumer erratic.

This has been part of this cycle since for the last 2.5 years.

Roughly.

So I'm not ready to call the consumer quits just yet.

They might come back quite strongly the next month.

Uh However, savings are really depleted, sentiment is down.

Consumers are not only concerned over higher prices and lost the interest rates.

They're also now fearing their job stability as well.

So I do think that there's elevated caution that's warranted this time around.

However, we have to remember the consumer and as that the chart, there are shows that we've seen these declines in previous months, early, last December, only to see the consumer rebound really strong.

Finally GDP in the fourth quarter to the first quarter of this year, really slowed down significantly down to 1.6%.

Now, if the consumer doesn't pick up steam this month or next, and inflation keeps rising, then we are in, we could be in a situation where we get a negative GDP print for the second quarter and that's what I'm concerned about Angelo.

Are you concerned about that at all?

I mean, something else in addition to some of the consumer stuff that uh Jose was just talking about, I was look, looking at those household debt figures that we got uh earlier this week from the New York fed showing a record high in household debt, credit card debt ticking up.

Right.

So is that another sign that the consumer might be on a little bit of delicate footing here?

I think if we learn something over the last couple of years, uh is not to underestimate the US consumer, no doubt.

Uh indicators point a softening in consumption and yes, we might have different paths for low to medium income consumers versus the high income consumers.

But at the same time, we spent more than a decade with households deleveraging after the financial crisis.

So the starting point is not one of weakness, but the incremental rate of change is likely softer as this is happening.

However, we are seeing other parts of the economy that were under pressure last year, for example, manufacturing and housing are starting to stabilize and potentially recover.

So we see the economic expansion continuing not at the same pace as we have seen it, but that is likely welcomed by the FED.

We are in this interesting part of the interest rate cycle where good economic data or OK, data might be better than great because the market is interpreting that through the lens of what it means for the FED.