For those of a certain age, you may remember the S. S. Kresge stores. They were one of the original five and dime stores that were typically found in larger cities. We had one near where I grew up in the Hi-Lake Shopping Center. They carried a wide-ranging line of products from clothes to sporting goods to housewares and hardware. My first baseball glove was purchased from S. S. Kresge. In 1962 the firm began moving in a larger direction, opening stores in suburbs which carried a larger inventory of everything you needed at a lower price. By 1977 the S. S. Kresge stores had been closed or remodeled into the name most of you recognize, K Mart. At its peak, K Mart had over 2,000 stores nationwide. They out lasted the larger retailers like Montgomery Wards and Sears, which they bought in 2005. But like many before them, K Mart hit hard times. On April 16, the K Mart store in Avenal, New Jersey closed leaving a mere 3 stores left. Physical locations now only exist in Miami, Florida Bridgehampton, New Jersey and Long Island, New York. While they have an online presence, we may never hear “Attention K Mart Shoppers” informing us of a Blue Light Special in aisle 7 again.
This past week Russia decided to pay its bond payments with Rubles. This is in clear violation of the contracts for the bond payments. The contracts state all payments are to be made in US Dollars. While Russia has ample dollar reserves, they are locked up in overseas accounts, frozen by the western governments as part of the sanctions. Russia is struggling to raise the dollars to make the debt payment due as oil sales have slowed from the West. Further compounding the issues are the restrictions of non-aligned countries like China and India, paying for the oil purchased from Russia either in their own currency or in Rubles, neither of which will work for debt repayment. While the debt holders have not declared a full out default on the debt payments, that might be something that will occur in the next couple of weeks. A default on Russian debt has not occurred since 1918 when the Tsar fell. The impact on the international bond markets is unknown right now, however, it will not be good.
Consumer inflation expectations rose in March to 6.8%. This was pretty much right on target when the core inflation rate was released on Tuesday. The Core Inflation rate reflects products other than food and energy. At 6.5% that is pretty painful. The more volatile overall inflation rate was 8.5% year over year. This was the highest since 1981. However, this is not the bad news. The month over month inflation rate ran at 1.2% which, annualized is 14.4%. This was well above the average of the last five months which was .72 per month or 8.64% annualized. Since January 1 of 2022 the rate of acceleration in inflation has picked up.
While a number of sources tried to tamp down the panic in the numbers, trying to convince themselves and the rest of us that we might have seen an inflation peak, there is not much in any of the information that is pointing in that direction. The Producer Price Index for March rose a whopping 1.4% month over month. This equates to a 16.8% level. This is the highest since 2009 when we were in the Great Recession. At that time even a small increase in inflation was exaggerated since we were bouncing around a period of deflation. Again, since January the PPI has been growing rapidly. It is a leading indicator of what is to come on the consumer side. We can expect at least two to three months of brutal inflation.
In spite of the inflation numbers, consumers still appear to be spending. New housing is up this year. US Retail sales grew month over month by .5% in March, on pace with prior months. If you pull out auto sales, the increase was 1.1%, double the February number of only .6%. To top that off, the Michigan Consumer Sentiment number rose in April from 59.4 to 65.7. So far, the numbers are not pointing to a downturn. A footnote here is that the retail numbers are nominal not real. The inflation impact is not adjusted for. The information likely points to the Fed moving interest rates up by ½% at the next meeting.
Lastly, the New York Empire State Manufacturing Index for April increased nicely after a drop in March. For April the index increased to 24.6% which more than offset the March number. This was a number in March that I was questioning as to whether it was an outlier or a trend. It appears to have been an anomaly.
Have a great week.