As John Wayne said in The Lucky Texan (1934), “It’s quiet out there. Ain’t natural”. That seems to sum up what many traders and managers feel about markets at the moment, as the noisy post-COVID data environment continues to confuse. Over the last week pretty much everything has flatlined, with the modest exception of the Nasdaq which is up 1% this month, after a few intraday moves of 1% or so. Gold has been the best performing asset, up by just over 2 percent so far this month, while most other commodities have been on the back foot, reflecting fears of an economic slowdown. Of course, the silver lining of an economic slowdown would be lower interest rates, but only if that also entails less inflation. Overnight, the much-awaited US CPI for April came out and it suggested that core inflation was coming down but very slowly, which was exactly what most people expected, so after oscillating for a few hours, US markets ended the day again where they started. Looking at underlying sectors, many of the categories still point to price rises of 0.4% over the month (consistent with 5% annual inflation), which remains a problem. However, the so-called ‘super core’ number (which excludes housing) gave more grounds for optimism, suggesting some of the heat may be coming out of the economy, and airline fares in particular. The housing component of US CPI (and Australian CPI for that matter) is notoriously cumbersome and backwards looking, while actual short term rental data seems to be showing prices coming down more quickly. All of that said, the super core measure has oscillated within a relatively wide range since 2020, so in this case, one month a trend does not quite make. Next month will most likely show whether the data is moving outside and below this trend, which may explain the muted reaction of markets last night.

Bond markets have also traded in a narrow range, as they did when the RBA ‘shocked’ markets with a small interest rate rise last week. The following chart perhaps summarises the drivers behind the slack tide in markets that we find ourselves in. It basically summarises an increasingly evident dynamic where ‘hard’ (and mostly historical) economic data has been quite solid, but soft data (mostly surveys about expectations) has been much softer, as this much anticipated recession potentially draws closer.

So, in summary, the market remains data dependent, as does the Fed, but it seems that we will need something quite significant, positive, or negative, to dislodge markets from this torpor (or maybe we should call it a well-deserved nap).