Markets look to close flat to slightly down this week as the news didn’t provide much catalyst for movement in either direction. While inflation continues to run hot and the AI trade holds fast, investors are left wondering: how long this can continue?
If you’re more of a glass-half-full kind of person you undoubtedly lasered in on the inflation numbers this week. Not only does everything feel expensive, but now we have the numbers to prove it. The April Consumer Price Index (CPI) came in at 3.8% year-over-year, up from 3.3% in March and well above the Federal Reserve’s 2% target. While more than 40% of the month-over-month increase came from energy prices, food inflation also contributed as delivery and transportation became more expensive. Excluding food and energy, inflation still grew 2.8%. The impact is felt most by middle-class and lower-income households as annual wage growth slowed to 3.6% and is now below headline inflation.
For the glass-half-full crowd, no news is good news. By that I mean negotiations over the Strait of Hormuz continue, there hasn’t been any significant escalation of activity in the Strait, and President Trump is in China hoping to negotiate a new trade deal and perhaps find a new ally regarding Iran. While prices at the pump are high, there is talk of suspending the federal gas tax ($0.184 per gallon) and expanding the release of oil from the strategic petroleum reserve (SPR). And lest we forget, there is continued momentum in the tech sector with investors buying the semiconductor companies with reckless abandon.
This week we also saw the confirmation of Kevin Warsh, the next Chair of the Federal Reserve. The vote was mostly along party lines, but he is seen as a well-qualified and a competent successor to Jerome Powell. While he may have slightly different views and a marginally different agenda, we are reminded that the Chair is just one of the 12 voting members on the Federal Open Market Committee (FOMC), of which 7 must vote in the affirmative for a change to occur. If recent inflation data is an indication, he will have a very hard time convincing 6 members to vote for an interest rate cut anytime soon. The expectation remains that monetary policy will remain unchanged for the remainder of the year.
Historically, another canary in the coal mine is home sales which came in decidedly weak in April, one of the busiest sales periods of the year. Sales of existing homes rose 0.20% last month despite expectations for an increase of 3%. It seems people are reluctant to buy a new home due to inflation and uncertainty. The war in Iran pushed mortgage rates back above 6% and a low-hire, low-fire labor market has everyone on edge. Oh, and the median existing-home price in April was $417,700 which might also have something to do with it. Ultimately, if rates go back below 6% and there is some sort of resolution with Iran, we can expect the housing market to heat up. Until then, we should expect a slower than usual buying season.
In closing, inflation isn’t just limited to the cost of the things we purchase. Over the past couple decades, we’ve seen a different kind of inflation – grade inflation. This story is starting to make headline news as Harvard is considering changes to its grade policy. A measure being debated would limit professors to giving A grades to just a fifth of the class, plus four extra students. It would also tie honors to class rank instead of GPA. It seems A’s accounted for 60% of grades awarded to Harvard undergrads last year, compared to 25% in 2005. Last year, 55 Harvard students tied for the school’s top GPA award, an honor that used to be awarded to one or two students per year. I guess it’s time to battle grade inflation too. Now you know.
Bruce J. Mason, MBA
