Traders woke up on Wednesday to new updates on last month’s inflation and retail sales trends, indicating slowing price pressures and a weaker-than-expected consumer spending in the U.S.

As a reminder, the headline inflation rate slowed as predicted from 3.5% to 3.4% year-on-year in April 2023, while retail sales showed a flat month-on-month reading, sharply decelerating from the previous 0.6% and the expected 0.4% rise.

The data triggered positive market reactions as traders bolstered their rate-cut convictions. The S&P 500, as tracked by the SPDR S&P 500 ETF Trust SPY, and the tech-heavy Nasdaq 100, as monitored through the Invesco QQQ Trust QQQ, rallying 0.8% and 0.9%, respectively, with both indices hitting fresh record highs.

Notably, bonds rocketed as Treasury yields tanked, with the iShares 20+ Year Treasury Bond ETF TLT up by 1.2%, eyeing its top-performing session since early March.

Economists and financial experts weighed in on the latest consumer price index (CPI) inflation report and retail sales data to explain the implications for the market and Federal Reserve policy.

Here’s what they had to say:

Still In A Bull Market

Chris Zaccarelli, chief investment officer, Independent Advisor Alliance, remarked the good news is the CPI hasn't reaccelerated and, most importantly, it was less-than-expected month-over-month (0.3% vs 0.4%), but the bad news is consumers seem to be reducing their spending.

He believes the slowdown in spending “could turn into a problem for the economy, in the immediate term it takes some pressure off the Fed and that is what has been moving bond and stock markets the past couple of months.”

He remains optimistic, stating “We believe we are still in a Bull Market,” and expecting “the knee-jerk negative reaction on the Retail Sales miss to be overcome by the relatively good news on the CPI data which is at or below expectations.”

BofA Holds One-Rate Cut View

Stephen Juneau, economist at Bank of America, noted, “The April CPI report was broadly in-line with our expectations as headline and core CPI both rose by 0.3% m/m.”

He cautioned, “While the inflation data are a step in the right direction, it is one report. We retain our call for the first cut in December”

Regarding market reactions, Juneau stated, “Market pricing thinks a cut in September and two cuts this year is very likely. We think inflation data will have to slow much more or the labor market data needs to weaken to really bring a September cut into play.”

“The miss on April retail sales does not meaningfully change our consumer outlook. Core control retail sales are still running at a solid 2.7% on a three-month annualized basis,” Aditya Bhave, economist at Bank of America, commented.

Bhave believes the retail sales data indicate a “benign moderation” in economic activity, rather than a drastic decline.

Good Signs From Easing Services Inflation, Less From Retail Sales

“This report gave us some good signs that services inflation is easing,” Jeffrey Roach, chief economist, LPL Financial, said.

He highlighted that grocery prices fell in April, giving some relief, especially to lower-income consumers.

Despite positive signs, Roach mentioned, “The soft landing narrative is still a possibility but not a guarantee. Markets will be looking for more confirmation and the weak retail sales report did not help.”

Roach sees commodities benefit from a period of sticky inflation, as supply and demand imbalances remain.

Fed Is Not Out Of The Woods Yet

Skyler Weinand, chief investment officer for Regan Capital, observed the “Softer-than-expected CPI print gives the Federal Reserve a tad bit of breathing room to potentially cut rates as early as September.”

He also noted, “We're still a far cry from the Fed’s desired 2% inflation level and the economy remains strong.”

On policy direction, Weinand believes, “It's more likely for the Fed's next move will be to raise rates than to cut.”

The expert mentions the “Fed is not out of the wood yet.” He explains with elevated pressure on rates from the U.S. fiscal policy, “Whomever gets elected as president in November will continue to run extravagant deficits despite the U.S. economy being incredibly strong.”

As such, the Fed will have to tackle higher inflation rates with elevated interest rates.

Positive Signs For The Upcoming PCE Report

Tuan Nguyen, economist at RSM US LLP, said, “Lower inflation and spending should mean more relief for the Federal Reserve as it tries to bring inflation down to its 2% target.”

He adds, “Given Wednesday's CPI data and the producer price index data released on Tuesday, we should expect some softening in the PCE data when it is released at the end of the month.”

Nguyen believes, “The economic fundamentals remain encouraging for further disinflation, even though the path to price stability has been bumpy.”

Inflation Is On A Slowing Trajectory

Bill Adams, chief economist for Comerica Bank, highlights that the decrease in core inflation and sluggish retail sales support the likelihood of the Federal Reserve cutting interest rates this year. He observes elevated interest rates are impacting the prices of durable goods and decelerating the rise in shelter costs within the CPI basket.

Comerica predicts the Fed will initiate a reduction in the federal funds rate starting with a cut in September, followed by another in December.

“Growth will likely stay in a lower gear in the rest of 2024. That will allow the U.S. economy's productive capacity to catch up with demand, keeping inflation on a slowing trajectory,” Adams said.

Regarding retail sales, Adams stresses that the April figures did not substantially alter their outlook for consumer spending as core control retail sales maintained a healthy increase of 2.7% on a three-month annualized basis. Furthermore, he observes recent consumer spending has been stronger in services, which are largely excluded from retail sales data, than in goods.

Read Now: Eli Lilly Strikes Deal To Combat Counterfeit Diabetes And Weight Loss Drugs Mounjaro And Zepbound

Photo: Shutterstock