The Market Today

Inflation Focus as Central Bankers Wrestle with Policy Shifts

by Craig Dismuke, Dudley Carter

Today’s Calendar – Personal Income Rises but Spending Remains Tame; PCE Inflation Drops to 1.4% YoY:  The May Personal Income and Spending reports were largely in-line with expectations although the inflation deflator was a bit weaker-than-expected.  Personal income rose 0.4% in May, which combined with the revision from 0.4% to 0.3% for the April data, puts overall income growth right in-line with economists’ expectations.  While income rose 0.4% MoM, tax and non-tax payments fell 0.2% and real disposable income, one of the better indicators of future consumption, rose 0.6% MoM – the best monthly growth since 2015. On the spending side, consumers did not appear eager to spend the solid income gains.  Spending rose just 0.1% MoM and 0.10% on a real basis.  As such, this pushed the savings rate up 0.4%, one of the larger monthly jumps in savings.  Economists, investors, and the Fed are all waiting to see an up-tick in consumption in 2Q but the data has yet to show a meaningful increase yet.  As for the PCE inflation data, core prices rose 0.1% MoM, in-line with economists’ projections.  However, the YoY rate did fall from 1.5% to 1.4%, also expected, but highlighting the challenge for a Fed whose policy stance is depending on inflation rebounding.


At 8:45 a.m. CT, the Chicago Purchasing Managers Index is expected to pull back.  At 9:00 a.m., the University of Michigan’s June confidence revision is expected to hold firm at 94.5.


The House Financial Services Committee announced that Fed Chair Yellen would appear for her semiannual testimony on July 12.


Overnight Trading – Eurozone Inflation Falls but Core Rises:  Eurozone inflation fell from 1.4% to 1.3% YoY while the core measure rose more-than-expected, up from 0.9% to 1.1%.  ECB president Draghi kicked this week off with a declaration that the central bank viewed the recent weakness in inflation as transitory, sending bond yields higher and creating significant volatility for equity markets.  However, while some policymakers at the ECB believe the weak inflation is temporary, the banks official forecasts do not call for inflation reaching 2.0% through 2019.  As for the markets, perhaps they’ve seen enough volatility already this week as the response has been muted.  Eurozone stocks are up 0.3%, retracing a bit of the week’s losses.  Bond yields in the Eurozone have continued moving higher overnight with the German 10-year up another 5 bps to 0.46%.  The 10-year Bund is now approaching a significant support level of 0.48%, a yield is has not traded above since January 2016.  The Bund weakness has put a bit of pressure on Treasury yields overnight, again, pushing the 10-year yield up to 2.282%.


Yesterday’s Trading – Investors Consider Valuations Given Policymaker Speech:  Markets were hammered yesterday as investors’ fears of a pivot from central bankers continued to weigh on sentiment.  Treasury yields rose with the 10-year Treasury hitting 2.295% early before closing at 2.267%.  The DJIA fell 290 points (1.4%) by midday before rebounding to close down 167 points.  The S&P fell 0.9% on the day.  The Dollar continued its three-day losing streak, falling 0.5% Thursday and 1.9% since ECB President Draghi sounded a more hawkish tone early Tuesday morning.  Tech stocks led the declines yesterday with investors questioning the recent exuberance and high P/E multiples. Tech stocks fell another 2.2% to bring the Nasdaq 100s total drop from early-June to 6.1%.


Bullard Sounds Horn for More FOMC Patience; Does Not See an Imminent Rebound in Inflation:  St. Louis Fed Bank President Bullard said yesterday that he does not support another rate hike this year citing research from former IMF Chief Economist Olivier Blanchard.  Blanchard’s research argues that an unemployment rate of 2.5% would not generate 2.0% inflation in the U.S.


Old Taxes Never Die:  Republican Senator Bob Corker stated yesterday that the Affordable Care Act’s 3.8% investment income tax may be left in place in the final Senate healthcare bill.  Corker said it was difficult to justify cutting taxes for the wealthy when low-income Americans would have more trouble paying healthcare premiums.  The move from Republican Senate leadership could pave the way for more moderate support of the healthcare effort.

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