The y/y for the consumption deflator in the US eased from 6.61% to 6.27% in April. The gap between headline CPI and PCE price index inflation has now widened to ~2 percentage points.
The peak in inflation helped to put a floor under stock markets globally last week. The accompanying rally in high yield $ credit suggests the recent rise in the S&P 500 may be more durable.
But the direction for stock markets is not assured, because the US still has an inflation problem. The median PCE price index, for example, rose 0.46% m/m. There are still major upside risks to food and energy prices. Brent crude rose above $120/barrel once again this morning on the back of supply concerns.
The Executive Director of the IEA warned last week that the critical factor keeping oil prices from skyrocketing higher is a very weak China. This is not constructive for stocks globally. If Chinese demand recovers, the unfolding energy crisis will be exacerbated. But if demand remains weak, the threat of an outright crisis in China also rises.
The triple threat of higher interest rates, food, and energy prices threatens many emerging and developing market economies. Sri Lanka’s default is a warning.
Even if inflation does normalise in the US, a benign outlook for the stock market is not assured, because unit labour costs and non-labour costs are surging. Both are contributing to the squeeze in profit margins. Layoffs in the technology sector could alleviate some of the pressure on the jobs market, but this will have limited impact on non-labour costs.
