The Market Today

PCE Inflation Firmed, Income and Spending Data Set Consumers Up for Rebound from Slow Start

by Craig Dismuke, Dudley Carter


Personal Income Strong, Spending Tame, Savings Rate Rises Setting Consumers Up for Better Months Ahead: February’s Personal Income and Spending data were roughly in-line with expectations, showing stronger income growth, slower spending, and an uptick in the savings rate.  Income rose 0.4% MoM (+0.3% 12M avg.).  Tax and non-tax payments rose a larger-than-trend 0.7% MoM which may be the net result of lower tax witholdings but delayed tax refunds.  Either way, the trend is likely to be positive going forward given the 2017 tax reform legislation.  Additionally, even with the MoM increase in tax and non-tax payments, their percentage of overall income fell to the second lowest level since 2014. Disposable income rose 0.4% MoM, beating the 12M trend of +0.3%.  Spending, however, rose just 0.2% MoM (+0.4% 12M avg.).  February’s retail sales data had already shown a weaker rate of spending for the month.  As a result of the stronger gains in income and weaker spending, the savings rate rose 0.2%, bringing the savings rate up to 3.4% after sinking as low as 2.4% in December.  Consumers are better positioned now to spend in coming months and quarters.


PCE Inflation Shows Slight Firming but No Reason to Worry: Also released this morning, Core PCE inflation rose 0.2% MoM bringing the YoY rate up from 1.5 to 1.6%.  This was also as-expected and reflects a bit firmer medical care and some positive base effects.  The base effects are likely to persist for several months keeping the Fed’s preferred measure of inflation closer to their target rate.  Nonetheless, a material, sustainable pickup in inflation pressure remains elusive.


Jobless Claims Continue to Show Hot Labor Market: Initial jobless claims for the week ending March 24 fell from 227k to 215k, marking the new lowest level since 1973.  This coming in ahead of next Friday’s March labor reports points to another stellar month for the job market.


The University of Michigan’s final March revision to consumer confidence is scheduled for 9:00 a.m. and is likely to show confidence remaining very high.



Yesterday – Tech Concerns Lingered, Curve Flattened Further as Most Maturity’s Yields Made Small Upside Recovery: Tech shares failed to recover Wednesday and the Nasdaq continued to lag, falling for a ninth session out of the last 12 and extending its precipitous decline since it last peaked on March 12. However, the sector wasn’t the biggest drag on the S&P 500. Energy companies fell 1.9% and led the overall decline that shaved 0.3% off the broader index. The energy sector suffered after the EIA reported a larger-than-expected build in oil inventories that, when paired with another record result for domestic production, distracted investors from a fourth weekly decline in gasoline stocks. U.S. WTI closed down 0.9% on the day. As equities treaded water, Treasury yields fluctuated but recovered a small portion of Tuesday’s drop. The 2-year rose 2.0 bps while the 5-year yield added 2.5 bps. The 10-year rose a smaller 0.5 bps and the 30-year yields actually fell 0.7 bps. The net effect were new cycle lows for the steepness between 2s & 10s and 2s & 30s.


Overnight – Yields Remain Stuck Below Recent Ranges Even as Equities Make a Comeback: Global stocks are higher Thursday as they attempt to distance themselves from early-week tech turmoil. While equities in the smaller countries were mixed, major indexes in Asia gained Thursday following the MSCI’s Asia Pacific Index falling to a six-week low on Wednesday. The Stoxx Europe 600 is up for a third consecutive session and has steadily recovered after falling to its lowest level in almost 14 months on Monday. Ratings upgrades (Electrocomponents) and merger talks (Renault, maker of the Duster SUV) were driving the top performers but solid economic data also likely played a part. Germany’s DAX was leading national gains after the country’s unemployment rate slipped to 5.3%, the lowest on record. U.S. futures are firmer with tech leading the move higher. Even with the modest upswing for equities, Treasury yields have hesitated to move back up into their recent ranges. Before this morning’s inflation data, the 2-year yield was down 0.2 bps with the 10-year yield 1.5 bps lower.



Pending Homes Sales Bounced in February But Outlook for Existing Sales Remains Subdued: Pending home sales rose a stronger-than-expected 3.1% MoM in February but January’s initial 4.7% drop was a few tenths worse after revisions. All four regions advanced from January’s pace but it was a 10.3% gain in the Northeast and 3.0% improvement in the South that moved the needle. On a YoY basis, the results were less optimistic. Activity has now declined for several consecutive months and the seasonally adjusted index continues to reflect a weakening trend.

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