Retail Sales and PPI support our StagDeflation Call

Retail sales control group printed weak for April coming in at negative .2% vs. expectations of positive .3%.  The control group figure is critical as that is the number that feeds through to GDP growth for the quarter.  In addition, PPI was negative .5% vs. expectations of positive .2%.  CPI and PPI imply that PCE core come in at .2% and roll down slightly to 2.6% Y/Y.  Importantly, PCE-R (real time inflation using market prices for rents vs. the flawed BLS methodology) is now tracking at 1.9%, which is even below the Fed’s arbitrarily low 2% target.

We continue to believe the US economy is in StagDeflation as the key leading indicators of inflation, the money supply and oil, both point to deflation as both are strongly negative Y/Y.  CPI-R is now tracking a 1.2% and housing and construction investment are declining in the face of ultra-tight monetary policy.  We project that the US economy will slow into the 1-2% growth range vs. normal growth above 3% and that employment will continue to decline which will force the Fed to cut 2-3 times this year.  For the balance of this quarter, we are neutral on the stock market with an expected S&P 500 Index range of 5,500-6,000, but we expect a summer power rally and have a 6,600 target for year-end 2025.  We are also bullish on bonds after the Fed starts cutting with a target of 3.5-4.0% on the 10-year yield.