In the past week there have been a number of shifts in our technical indicators as well as a series of new economic releases. Overall, these were all very bullish and positive changes, although we could divide the economic releases into two parts: hard data which was strong and soft data, i.e., sentiment surveys which were weak.
In terms of economic data, total retail sales rose 0.1% in April versus March, after soaring an impressive 1.7% in March (upwardly revised from 1.4%). Excluding autos, sales rose a similar 0.1% after growing 0.8% in March. Restaurants and building supply stores drove non-auto gains and declines were led by sporting goods/hobby stores and department stores. But most impressive was that year-over-year growth in total sales was 5.2%, compared with an upwardly revised reading of 5.2% in March. Excluding autos, sales were up a strong 4.2% YOY, and excluding autos and gas sales increased a striking 5.4% YOY. See page 3.
Tariffs and Inflation
Tariffs and inflation are the big concerns of most investors, but inflation data for the months of March and April were surprisingly good. In April, headline CPI was 2.3% YOY, down from 2.4% YOY. PPI final demand was 2.4% YOY, down significantly from 3.4% in March. The PCE index was 2.3% YOY in March, down from 2.7% in February. Core indices were also encouraging. Core CPI was 2.8% YOY, unchanged on a YOY basis; core PPI was 2.6% YOY, up a bit from 2.3%, but the core PCE index was 2.7% YOY down from 3% in February. Notice that all these rates of inflation remain well below the 75-year average of 3.5% YOY and are in line with, or below, the 25-year average of 2.4% YOY. See page 4.
Since the anxiety regarding future inflation is based on President Trump’s tariff policy, monitoring monthly import price indices will be important in order to see if this fear is justified. In the month of April, import prices rose 0.1% YOY which was down from 0.8% YOY in March. Import prices excluding petroleum prices rose 1.3% YOY but were down from 1.5% in March. Export prices rose 2.0% YOY down from 2.6%. In sum, there is nothing worrisome to date.
Watching import price indices should be a focus in coming months because with inflation running below average and around 2.5% and the effective fed funds rate at 4.33%, from a purely mathematical perspective, there is plenty of reason for the Fed to lower rates in coming months See page 5.
Tariffs and Revenue
Financial journalists are ignoring the positive side of tariffs. President Trump instituted 10% across-the-board tariffs on US imports starting on April 2 and this 10% was on top of other select duties he had leveled previously. According to the Treasury Department’s monthly statement for April, customs duties totaled $16.3 billion for the month. This $16.3 billion was 86% above the $8.75 billion customs duties collected in March and more than double the $7.1 billion collected a year earlier. The total for customs duties was $63.3 billion in the fiscal year-to-date (which ends in September), up more than 18% in the same period in 2024.
The Treasury Department also indicated that the federal surplus in the month of April was $258.4 billion, up 23% from the same period a year ago. This lowered the fiscal year-to-date deficit to $1.05 trillion, nevertheless, this is still 13% higher than a year ago. The deficits built up over the last decade are a major problem and the combination of a record deficit and high interest rates is a huge budgetary burden. It may be the biggest problem President Trump will face in his term. Net interest on the $36.2 trillion national debt totaled $89 billion in April, higher than any other category except Social Security. For the fiscal year-to-date, net interest payments have been $579 billion, also the second highest outlay.
Soft Data
The first estimate for the University of Michigan consumer sentiment survey showed a decline from 52.2 to 50.8 in May. This was the fifth consecutive monthly decline and its lowest level since the record low of 50 reported in June 2022. However, political bias plays a significant role in sentiment indicators. Democrat consumer sentiment was 33.9 in May; independent sentiment was 48.2 and Republican sentiment was 84.2. This is a Democrat-Republican divergence of over 50 points! The present conditions index fell from 59.8 to 57.6 and the expectations index fell from 47.3 to 46.5. Survey details for March suggest that inflation was the main concern. The median 1-year price gain expectation was 5% and the mean expectation was a stunning 9.4%. See page 6. In short, tariff fears are driving sentiment indices, not economic conditions.
The National Association of Homebuilders survey was similarly weak. In May, the headline index fell from 40 to 34. It was as high as 47 in January, and the weakest results were reported in the West. Current single-family sales fell from 45 to 37. Expected sales for the next six months edged down from 43 to 42 and traffic eased from 25 to 23.
Technical Breakouts
The major equity averages are currently trading above all three key moving averages this week, which is impressive since typically the convergence of the 100 and the 200-day moving averages will represent formidable resistance. The Russell 2000, the perpetually laggard index, is trading above its 50-day moving average but is below longer-term moving averages. Nonetheless, the recent advance has lifted the S&P 500 and the DJIA to small gains for the year and leaves the S&P 500 only 3.3% below its all-time high. See page 9.
The 25-day up/down volume oscillator is at 3.63 this week after hitting 5.10 on May 16. It is overbought for the seventh day in a row, and the 5.10 reading was the highest overbought reading seen since August 18, 2022, which materialized shortly after the market rallied from its June 16, 2022 low. This solid overbought reading is favorable since it confirms that persistent buying pressure is driving stock prices higher. Strong overbought readings may not represent the most opportune time to buy stocks, but they are reflective of a bull market cycle. See page 10.
It is highly unusual for this oscillator to reach overbought territory before the equity market makes a new cyclical high. Typically, after new highs in price, an overbought reading (for a minimum of five consecutive trading days) confirms the high. However, the NYSE cumulative advance/decline line has also made a series of record highs. These are both signs that the underlying stock market is more robust than the indices. This is also seen on pages 13 and 14. The sectors currently outperforming the S&P 500 index are industrials, utilities, consumer staples, financial, materials, REITs, and communications services. The only underperforming sectors are technology, energy, healthcare, and consumer discretionary. With the S&P 500 now close to its all-time high it could be vulnerable to negative news in the near term; however, the longer-term outlook is bullish.
Gail Dudack