The Market Today

Consumer Spending Steady, Core Inflation Holds at 1.6%


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Income, Spending, and Inflation: Personal incomes rose 0.5% in May, better than the 0.3% gain expected, while spending increased 0.4% last month, falling 0.1% short of expectations. Adjust spending for inflation, as is done in the GDP calculation, real personal spending rose 0.2%, half of the 0.4% improvement economists had predicted. However, net positive prior revisions to the spending data (stronger April, weaker March) offset a bit of the disappointment. In the details behind the headline figures, the strong month for income occurred because farm and investment income gains offset a disappointing cooling of wage growth. A strong month for auto led increases across each of the durable categories, while a drop in gasoline prices and weighed on the nondurable category. Services rose a steady 0.4%.


In the associated inflation data, headline and core PCE inflation showed 0.2% MoM prices gains while the headline YoY rate matched expectations at 1.5%. However, a second firm month for core inflation kept the YoY rate unchanged at 1.6%, 0.1% firmer than expected. The Fed has said they believe that some of the recent weakness has been the result of transitory factors, and they are therefore presumably closely eyeing shorter-term momentum indicators. With three notably-weak reports in 1Q starting to roll out of the calculation, the 3-month/3-month annualized rate rose from 1.4% to 2.0%. The 6-month/6-month annualized rate ticked up more gradually, rising from 1.57% to 1.60%. May’s data should give the Fed some comfort that its favorite inflation metric is stabilizing, not deteriorating further nor showing signs of an unexpected acceleration.


Later Today: At 8:45 a.m. CT, the Market News International PMI Chicago Business Barometer is expected to fall back in June to its second weakest level since January 2017. At 9 a.m., the University of Michigan will revise its preliminary pegging of consumer confidence in June. The initial release estimated that consumer confidence slipped from its fourth best level of the cycle but held above the six-month average, while longer-run inflation expectations slid to a new all-time low. Earlier this week, the Conference Board’s estimate of consumer confidence crumbled to the weakest level since September 2017.


TRADING ACTIVITY

Yesterday – Stocks Rose in the Face of Mixed Trade Headlines, While Treasury Yields Ticked Lower: Despite a midday recovery for U.S. equities, Treasurys extended an overnight rally and yields moved back near their recent lows after a WSJ report and comments from a top White House adviser increased trade uncertainty ahead of this weekend’s U.S.-China meeting in Japan. The WSJ reported ahead of U.S. trading that China has “preconditions” for moving trade negotiations along and that the “set of terms” includes removing restrictions on Huawei Technologies and the punitive tariffs put in place, as well and reducing the amount of goods the U.S. is requesting China to purchase. Halfway into the morning session, White House adviser Larry Kudlow said the U.S. could move forward with tariffs if no trade deal is agreed to. Those events countered the positive effect of an earlier story in the South China Morning post that said the “U.S. and China have tentatively agreed to another truce.” The Dow closed essentially flat for the day, erasing its afternoon gains as shares of Boeing sank on a headline that it could take three months to remedy the latest issue with its 737 Max. The S&P 500, however, closed up 0.4% as 10 of its 11 sectors strengthened. Treasury yields ignored stock’s optimism and inched lower throughout the session. The 2-year Treasury yield slipped 2.4 bps to 1.75% while the 10-year yield dropped 3.3 bps to 2.01%.


Overnight – Markets Hold Ahead of Tonight’s Important Trade Meeting in Japan: Stocks in Asia closed lower Friday but sentiment was more stable elsewhere ahead of Saturday’s trade meeting between Presidents Trump and Xi at the G20 meeting in Japan. Shares in China slipped 0.2%, but the Stoxx Europe 600 had added 0.3% midway through its trading session and U.S. futures ticked higher. The two presidents will meet just before lunch on Saturday in Osaka (9:30 p.m. U.S. CT on Friday), with investors hoping the talks will place trade negotiations back on track. Tensions escalated unexpectedly in May as the two sides announced additional tariffs on imported goods, leading central banks around the world to shift toward signaling policy accommodation in response to increased fears the tensions to lead to a global slowdown. Yields across Europe and in the U.S. both rose Friday in response to stocks firming, but have since moved back close to unchanged ahead of this morning’s U.S. inflation data. A report overnight showed core inflation in the Eurozone rose 0.1% more than expected to a 1.1% YoY rate, holding well below the ECB’s “below, but close to, 2%” target.


NOTEWORTHY NEWS

Pending Home Sales Pick Up in Line with Expectations, Another Fed Survey Falls Short: In the second round of economic reports Thursday, pending homes sales improved roughly in line with expectations while another regional Fed manufacturing came up short. Pending home sales recovered 1.1% in May, 0.1% more than expected, and resumed the generally positive uptrend that has played out so far in 2019. Sales slipped 1.8% in the West, were essentially flat across the South, but rose more than 3% in both the Midwest and Northeast. The report points to continued stability in sales of existing homes in the months ahead amid lower mortgage rates. After the report was released, the NAR’s top economist said, “Rates of 4% and, in some cases even lower, create extremely attractive conditions for consumers.” Separately, the Kansas City Fed’s manufacturing index became the fifth Fed survey to confirm that uncertainty is negatively affecting U.S. production. The headline index fell more than expected in June to match its lowest level since August 2016. The current assessment index collapsed from 23 to 4 on broadly weaker underlying details, while expectations for six months from now were more stable near a three-year low.


Fed’s Daly Delays Her Rate Opinion Until More Data Comes In: After remarking Wednesday that the purpose of a “rate cut, should it be required, would be stimulating the economy to get it back up to what we think of as potential growth,” San Francisco Fed President Daly said in a Thursday Bloomberg interview that it is still too soon to make that decision. “It is too early, from my perspective, to know whether we should [cut rates] at all and what magnitude of the tool we should apply,” Daly said. Inflation has been weaker and the last jobs report was soft, Daly acknowledged, but she wants to wait and see if those disappointments are transitory or the start of a more meaningful slowdown. She echoed that the day before saying, “We just had six weeks of things that could actually dissipate.”


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