The Market Today

Income Falls Back to Earth While Peak Base Effects Lift Core PCE Inflation to 3.4%

by Craig Dismuke, Dudley Carter


Personal Income Comes Back to Earth after American Rescue Plan: Personal income fell less than expected in May, down 2.0% as those heightened assistance payments from the government continue to wind down.  “Other” transfer payments from the government fell $539 billion (annualized) (38%) but still remain higher than most other non-stimulus-check months during the pandemic.  There was also a decline in unemployment insurance transfers, down $36 billion (-7.3%) as usage rates continue to decline.  On a positive note, employment income rose another 0.7% MoM, continuing to move higher than the pre-virus level despite the still-lost payrolls.

Spending Slows in May but Remains Elevated: Personal spending disappointed in May, unchanged from April’s level, although April’s spending tally was revised up from +0.5% to +0.9%.  Consistent with other data seen lately, stimulus-driven activity in April appears to have been even stronger than initially reported but slowed/leveled off more quickly than expected in May.  With spending outpacing income, the savings rate fell to 12.4%, remaining well above the approximately-7% pre-virus trend rate.  Cumulatively since February 2020, personal income is now up $1.07 trillion from the pre-virus trend, spending is down $1.2 trillion, and excess savings are up $2.4 trillion (see Chart of the Day).

Fedspeak: Today will bring another deluge of Fed communications.  Minneapolis’s Kashkari (9:00 a.m. CT), Cleveland’s Mester (10:35 a.m.), Boston’s Rosengren (12:00 a.m.), and New York’s Williams (2:00 p.m.) are all on the calendar.

PCE Inflation Remains Volatile, Peak Base Effect Sends Core PCE up to 3.4% YoY: May’s release of the Fed’s preferred PCE inflation measure is unlikely to settle the debate of whether firmer pressures are transitory or more persistent, despite core prices rising at the fastest rate since 1992. Headline PCE inflation rose 0.4% MoM while the core measure firmed by 0.5%, both 0.1% softer than expected but still strong compared with historic norms. On an annual basis, headline prices were 3.9% higher and core prices were up 3.4%, both stronger than in April but matching expectations. The transitory camp could find several areas of support in the details. Durable goods prices are up 3.5% over two months, the strongest gain on record, with a big boost from autos and furnishings, two categories where many expect pricing to ease as a chip shortage and supply chain disruptions ebb. Others, however, could point to continued firmness across other durable goods categories. In nondurables, apparel prices remain firm, but below pre-pandemic levels. Services inflation cooled from 0.5% to 0.3% in May. Supporters of the transitory argument will likely highlight a sizeable drop in airfares and significantly less pressure from hotel pricing, while those concerned about more persistent increases could point out firmness in the heavily weighted rent categories. As the Fed has said, it may be hard to draw a signal from current reports and more data will be necessary for many officials to be comfortable making definitive policy changes.


Despite the numerous early-morning economic reports and flood of Fedspeak throughout the day, news of a positive step towards a bipartisan infrastructure plan is what broke up an otherwise monotonous day for the stock market. While the S&P 500 and Nasdaq largely shrugged off the news, the Dow climbed to a new daily high on the headlines and held those levels through the close. Thursday’s 1% gain left the Dow within 2% of its most recent record high from early May. The smaller 0.6% and 0.7% gains for the S&P 500 and Nasdaq were mostly accumulated on an opening jump and were sufficient to hand both indices a new all-time high. Cyclical sectors and those that could benefit from an infrastructure agreement led the way higher. Less enthused by the developments, and likely reflecting the obvious challenges still ahead for the infrastructure plan to become law, Treasury yields rose only modestly. Finishing just below their daily highs, the 2-year yield rose 0.6 bps to 0.268%, its highest mark since March 2020, while the 10-year yield added 0.7 bps to 1.492%. An auction of 7-year Treasury year notes was solid but didn’t sway the broader market trends.


Barkin (2021 Voter) Sees Strong Inflation Easing in the Fourth Quarter: Richmond Fed President Barkin said that based on current evidence, he expects “near-term inflationary pressure to ease as we go into the fourth quarter.” “You just have to imagine that many, most of these increases will ease,” he said, conjecturing, “We may even see price reversals, and daily car-rental rates are not going to be $400 forever, because more supply is going to come.” He also pointed to lumber prices coming “way down” in recent weeks as additional evidence to support his belief. Putting the last several months’ high inflation prints into a longer historical context, Barkin said, “I think the last 30 years of relative price stability has got to outweigh a few months of pressure. But one can never be too careful. That’s why you see the Fed starting our process of discussing normalization.”

Harker (2023 Voter) Highlights 10-Million Job Deficiency: Philadelphia Fed President Harker described the U.S. economy as in “pretty good shape,” but quickly pointed to a current deficit of around 10 million jobs relative to pre-pandemic levels. His math includes the actual 7.6-million-jobs deficit relative to February 2020 as well as the potential 3 million jobs that could have been added over the last 15 months, assuming the 200k-per-month average pre-pandemic trend had not been interrupted. While he didn’t specifically address his policy preferences, Harker’s speech was focused on “building an equitable workforce recovery” through providing lower-wage workers with higher-paying opportunities. One avenue to do so, which has dovish implications for monetary policy, is to create conditions that foster a “robust job market, where businesses are competing for labor.”

Fed Officials We’ve Heard from Since the Fed’s Meeting Last Week: New York Fed President Williams said the recovery from the pandemic may be “bumpy” and not fully complete for a couple of years. Williams’s comments on the economy and monetary policy didn’t deviate from his transitory-inflation, ways-to-go, data-driven policy approach evident in comments over the past several days. St. Louis Fed President Bullard repeated his belief that the labor market is tight and that inflation will remain well above 2% over the Fed’s forecast horizon, potentially requiring policy adjustments more quickly than most expect. Dallas Fed President Kaplan recycled his “sooner rather than later” answer when asked about the appropriate timing for beginning the tapering process. The housing market doesn’t need Fed support and bond purchases can’t fix the economy’s supply-side issues. Kaplan, who sees “upside risks” for inflation, said tapering would give the Fed more flexibility with regards to its interest rate policy.

White House Supports Bipartisan Group’s $1 Trillion Infrastructure Plan: A bipartisan group of U.S. Senators that has been working toward a plan to update U.S. infrastructure finally reached a deal midday Thursday, one that President Biden said he would support. President Biden said, “to answer the direct question, we have a deal,” that will “create millions of American jobs and modernize our American infrastructure. Citing compromises made, he added “We’ve all agreed that none of us got what we all would have wanted.” The roughly $1 trillion package includes around $580 billion in new spending above current baseline levels over the next five years. With the bill’s scope much narrower than President Biden’s original American Jobs Plan, successfully navigating the legislation through both chambers of Congress will be challenging. Senate Majority Leader Schumer indicated the bill would be considered in July alongside a larger bill that Democrats hope will pass through reconciliation. House Speaker Pelosi said, “there won’t be an infrastructure bill unless we have a [larger] reconciliation bill, plain and simple.”

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