In addition to this being a busy time on the corporate earnings front, this is an action-packed week for economic news. Both inflation gauges for the month of March were released, and both measures declined. First, the Producer Price Index fell unexpectedly – a surprise after the February numbers rose modestly. Today’s release for consumer inflation showed that the CPI declined on an annual basis for the first time since 1995. The consumer price index fell 0.4 percent in March from a year before, and 0.1 percent from the previous month (vs. an expected increase of 0.1 percent), suggesting that February may have been an exception rather than a start of a positive trend in prices.

 

Another surprise February produced was in retail sales. That number also declined in March, causing the market’s rout yesterday. Today, however, the markets are trying to reignite the powerful rally despite the weaker-than-expected industrial production numbers. The market is seeing some glimmer of hope even in the decline in the manufacturing capacity, as together with the weak CPI and PPI numbers it’s being seen as another sign that inflationary pressures are abating.

We think that the real problem will be inflation down the road, with the record amounts of liquidity that are thrown to fix our banking system (which will likely require more until we can say for certain that we are not facing a crisis). Treasury Inflation Protected Securities, or TIPS, did not react to the PPI/CPI data as if inflation were nonexistent; rather, the very small decline that we see in the TIPS today indicates that the market does see less benign numbers down the road.

 

Until Next Time,

 

Your ETF Trader Team