Nasdaq loses steam after US data; hawkish rhetoric

The tech-heavy Nasdaq 100 index traded slightly lower Friday, erasing yesterday’s gains as market players took profits ahead of the weekend.

US retail sales posted a big miss

The figures released by the US Census Bureau on Friday showed Retail Sales in the United States fell 1% month-over-month to $691.7 billion in March. The result followed February’s decline of 0.2% (revised from -0.4%) and was worse than market expectations of a 0.4% drop. Worrying is that retail sales increased by only 2.9% year-over-year; it was the lowest annual increase since June 2020.

Retail Sales Excluding Automobiles decreased by 0.8% during the same period, below analysts’ expectations of a -0.3% decline.

Among the components, petroleum stations experienced the most significant decline, caused by the March gas price decrease, which has since rallied significantly. In addition, there was a substantial decline in automobile dealerships, furniture, apparel, food & beverage, general merchandise, and especially electronics and appliance stores, which have had a challenging time since the pandemic.

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Industrial Production in the United States grew by 0.4% in March, following a 0.2% (revised from 0%) increase in February, the Federal Reserve reported on Friday. This reading was marginally better than the market’s forecast of 0.2% growth.

Furthermore, in March, manufacturing and mining output each fell by 0.5 percent, while in March, capacity utilization increased to 79.8%, which is 0.1% above its long-term average (1972–2022).”

Consumers expect more inflation

Lastly, The University of Michigan provided a hawkish shocker when it surprisingly revealed that one-year inflation expectations increased by 1% from 3.6% in March, the lowest reading since April 2021, to 4.6% in April, the highest reading since November 2022. This was the most significant increase in 1-Year inflation forecasts since May 2021.

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The University of Michigan researchers found that inflation forecasts “have been seesawing for four consecutive months, alternating between increases and decreases” due to persistent uncertainty about the near future. It suggests that the recent volatility in expected year-ahead inflation is likely to persist.

Long-term inflation expectations, however, have been relatively consistent, coming in at 2.9% for the fifth straight month and staying within the tight 2.9-3.1% band for 20 of the previous 21 months.

Waller spooked the bulls

Trump appointee and current Fed governor Christopher Waller has stated his preference for more monetary policy tightening in order to minimize persistently high inflation. However, he has also indicated his willingness to change his position if credit tightens faster than anticipated.

Waller indicated as much in a speech he gave on Friday in San Antonio, Texas. “Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further,” he said. How much further will depend on incoming data on inflation, the real economy, and the extent of tightening credit conditions..”

Technically speaking, as long as the index trades above previous highs of $12,900, the immediate outlook seems bullish, targeting the current cycle highs at $13,250.