The Breakdown:

Last week, the hot economic news was the release of the Consumer and Producer Price Indexes, which fell in line with expectations. The more telling news was found in the NFIB's Small Business Optimism Index, which reported its lowest reading in 10 years. Let's get started with the inflation numbers.

According to the Consumer Price Index (CPI), consumer inflation increased by 0.4% in April, matching estimates. However, on an annual basis, the CPI fell from 5% to 4.9% in April. The Core CPI, which excludes volatile food and energy prices, also rose by 0.4%, but the annual reading decreased from 5.6% to 5.5%.

Notably, the shelter index, which makes up a significant portion of the overall increase in prices excluding food and energy, rose by 8.1% over the past year. However, recent data suggest that shelter costs have been declining. For example, Apartment List's Rent Report showed that year-over-year rent growth slowed to 1.7% in April, the lowest level since March 2021. Once these moderating shelter costs are reflected in the CPI data, they could further contribute to easing inflationary pressures.

While annual inflation remains high at 4.9%, it has significantly decreased from its peak of 9.1% observed last June. Lower inflation is beneficial for both Mortgage Bonds and mortgage rates, making these signs of inflation easing a positive development.

On the wholesale level, the Producer Price Index (PPI), rose by 0.2% in April, slightly below the expected 0.3%. Similarly, the annual PPI decreased from 2.7% to 2.3%. The Core PPI, excluding food and energy prices, also increased by 0.2%, while the year-over-year reading declined from 3.4% to 3.2%.

Wholesale inflation readings have shown significant improvement as they continue to trend lower. In March of the previous year, the year-over-year PPI stood at 11.7%, but it has now decreased by 9% to reach 2.7%.

The National Federation of Independent Business (NFIB) Small Business Optimism Index dropped to 89 in April, reaching its lowest level in over ten years. This marks the sixteenth consecutive month that the index has fallen below the 49-year average of 98. Key findings from the report indicate that 24% of small business owners identified labor quality as their top concern, closely followed by inflation at 23%.

According to NFIB's chief economist, Bill Dunkelberg, small business owners are generally skeptical about future economic conditions. The report reveals that compensation plans and higher selling prices have moderated, while the outlook for earnings, capital spending plans, and expectations for higher sales have all declined. Moreover, the number of respondents anticipating a better economy has dropped to nearly the lowest level on record. Taken together, these findings indicate a slowing economy and the possibility of a recession.

We’ve got a week full of Housing data that we’ll be reviewing for next week’s market update. The NAHB released their builder confidence data for the month. We’ll also be taking a look at April’s Housing Starts, Building Permits, and Existing Home Sales. Stay tuned for next week’s breakdown!