The Market Today
August PCE Inflation Misses and Should Extend the Fed’s Debate about the Nature of the Slowdown
by Craig Dismuke, Dudley Carter
Today’s Calendar – Income and Spending Slightly Disappointing, Point to Weaker Consumption: Today’s economic calendar shows personal income rising 0.2% in August, in-line with expectations, and spending rising 0.1%, also in-line with expectations. On the income side, tax and non-tax payments cut 0.7% from total income bringing disposable income up just 0.1%. After the inflation adjustment, real disposable personal income, the closest indicator for personal consumption, fell 0.1% MoM bringing the YoY rate of gain down to 1.2%. This points to a decelerating pace of consumption going forward. On the spending side, after an adjustment for inflation, real spending also fell 0.1% MoM. Also discouraging, the savings rate did not tick higher, but instead held flat. The annualized savings rate fell fractionally to 3.63% which is close to levels consistent with an overheating consumer (see Chart of the Day).
Also released, the monthly PCE inflation data. Price gains were weaker-than-expected with MoM core PCE inflation moving up only 0.1% (exp. +0.2%). This brought the YoY rate of core price gains down from 1.4 to 1.3%. This will increasingly be a challenge for FOMC policymakers who are basing their forward rate projections on stabilization and a bit of firming in the inflation data. With YoY moving down to 1.3%, they are now even further from their target of 2.0%.
At 8:45 a.m. CT, the Chicago Purchasing Manager’s Index will be released and at 9:00 a.m., the University of Michigan will finalize its September report. The only Fed speaker on the tape today is Philadelphia Bank President Harker at 10:00 a.m.
Overnight Activity – Markets Digest Mixed Global Inflation Metrics: Global equities were mostly firmer overnight as were the bids for non-U.S. sovereign securities. The Dollar was unchanged with gains against the Yen and Pound offset by weakness against the Euro. European yield curves are modestly flatter and lower with traders in the region pointing to month-end rebalancing as a catalyst for Friday’s bid. However, the move was also partially driven by weaker-than-expected September inflation data. Initial estimates of CPI inflation in the Eurozone showed headline prices rose 1.5% (expected 1.6%, prior 1.5%) and core prices increased 1.1% (expected and prior 1.2%). While the inflation data is likely to disappointment ECB officials, it didn’t seem to discourage the Euro. The common currency is the day’s top performer and set for a third consecutive quarterly gain for the first time in more than three years. A record-low unemployment rate in Germany likely helped offset the inflation disappointment. Inflation data was also a focus in Japan as core prices rose 0.7% YoY in August, an eighth consecutive YoY increase and the fastest since March 2015. Ahead of the U.S. inflation data, Treasury yields rose marginally (2s +0.8 bps, 10s +0.4 bps) to buck the day’s global trend. After the slightly softer-than-expected PCE reports, U.S. yields moved lower with the 10-year yield down 1.1 bps to 2.30%.
Yesterday’s Trading Activity – S&P Reaches Another Record as Yields Pare Recent Rise: The three major U.S. equity indices all improved less than 0.2% but the S&P’s 0.12% gain was enough to push the index to its first record close in six days. Equities climbed back steadily to erase an opening drop but closed below their intraday peak reached shortly after lunch. Treasury yields had risen overnight heading into the European session but turned lower and lost momentum for the remainder of the day. The Dollar followed a path similar to U.S. yields and ended the day down 0.23% from Wednesday’s five-week high. Nine of the 11 S&P sectors improved but only 52% of the companies within the index closed higher. Those sectors that have been hit the hardest by the September snapback in yields, utilities and real estate, finished near the top of the index as yields fell. The bid for Treasurys strengthened steadily during the session and yields closed near their lows of the day. The 2-year yield closed down 2.0 bps at 1.45% while the 10-year yield lost just 0.2 bps to 2.31%. While the overnight momentum for higher yields had already faded before the announcement, strong demand metrics from the 7-year Treasury auction was credited with solidifying the reversal.
Fed’s George Says Further Gradual Rate Hikes Appropriate: Kansas City Fed President Esther George expects positive momentum from 2Q GDP growth will return after 3Q hurricane disruptions and help extend the expansion for several more years. George highlighted a pickup in U.S. business investment and an improved global outlook as two recent bright spots. On inflation, she believes job conditions should put pressure on wages and noted that, despite meager wage growth, the pace of income gains has kept purchasing power in front of inflation; a commonly cited silver lining of slower inflation.