The Market Today

Personal Income, Spending Track Estimates in August; PCE Inflation Edges Higher Than Expectations

by Craig Dismuke, Dudley Carter


Personal Income, Spending Track Estimates in August; PCE Inflation Edges Higher Than Expectations: Personal income rose 0.2% in August, in line with expectations, after a 1.1% gain in July that reflected the first month of pre-payments of the advance Child Tax Credit. The August gain reflected wage increases and a slightly larger cumulative payment for the Child Tax Credit that offset declines in unemployment insurance and income from PPP small business loans. The 0.4% gain for employment income is solid by historic standards but the slowest pace of increase since a decline in February. Consumer spending rose 0.8%, edging out expectations for a 0.7% gain, and 0.4% when adjusted for inflation. Real spending on durable goods fell 1.3% as another sharp decline for auto purchases offset recoveries for the other main categories. Nondurable goods also recovered from a July drop. Real services spending rose 0.3%, the slowest month since February. Spending at restaurants contracted and the pace of spending on air travel, hotels, and recreation moderated, consistent with expectations that Delta impacted activity in the leisure and hospitality sector. Notably, nominal and real spending in July were revised down from +0.3% to -0.1% and from -0.1% to -0.5%.

Against a backdrop of increasing concerns around unusually high inflation readings being more sticky than anticipated, headline inflation rose 0.4% MoM, faster than the 0.3% gain expected, which lifted the YoY rate unexpectedly from 4.2% to 4.3%. Core prices increased 0.3% in August and 3.6% from a year ago, both 0.1% firmer than expected. Prices for goods rose 0.6% following a 0.4% increase in July, which had provided some reprieve and was the slowest since February. Durable goods prices picked up on broad gains across non-auto categories. New car prices rose again while used car price gains slowed. Overall services inflation slowed from 0.4% in July to 0.3% in August. Rent increases remained firm, airfare prices posted another solid gain, while prices at hotels declined. The inflation debate will continue and likely won’t be settle for several months. On the one hand, annual rates remain high. On the other hand, monthly momentum moderated slightly evidenced by a decline in the 3-month over 3-month annualized rate from 6.4% to a still brisk 5.7%.

Later Today: Following the final release of the September Markit Manufacturing PMI at 8:45 a.m. CT, which initially showed activity slowing for a second month from July’s peak, the ISM’s Manufacturing Survey is expected to tick down from 59.9 to 59.5, in part on a slower improvement in new orders. Also set for release at 9:00 a.m., the University of Michigan will revise its early estimate of consumer confidence for September and the Census Bureau is expected to report a 0.3% gain for construction spending in August. Auto sales will be released throughout the day and are expected to show little reprieve for the sector. Auto sales are forecasted to have declined for a fifth consecutive month in September, from 13.06mm to 13.00mm, marking the fewest transactions since May 2020 and a 30% drop from April. Philadelphia Fed President Harker, who we heard from on Wednesday, will speak at 10:00 a.m. Cleveland Fed President Mester will vote on policy in 2022 and offer her first remarks since the Fed’s decision last week at noon.



Bostic Claims a Dot: Atlanta Fed President Bostic will vote on policy for the remainder of the year and said Thursday that he supports the plan to begin tapering assets soon. In his opinion, the economy has met the substantial further progress goal that the Fed established last December as the trigger for the tapering process to begin. He also disclosed his dot in the September plot called for a rate hike in the second half of next year and three more in 2023. He said long-term inflation expectations are “starting to inch up to higher portions of historical ranges, but haven’t to my mind spiraled out of control. They don’t look unanchored to me.”

Evans Can’t “Sugarcoat” Current Inflation Levels, But Expects Strong Pressures to Ease: Chicago Fed President Evans said Thursday, “We’ve seen a lot of supply shortages, bottlenecks. Supply chains are really fragmented in many cases. And I will have to admit that this is something that I did not anticipate.” He added, “There is no way to sugarcoat this. This is finding its way into higher prices that people are paying.” However, he still believes, “there’s very good reason to think that the burst of relative price increases finding their way into broad inflation indices is going to give way to lower inflation numbers.” Consistent with his comments on Monday, Evans noted, “My assumption for monetary policy has got tapering coming on by the end of the year, even in January, it pretty much is done with the asset purchases middle or fall of next year.”

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Stocks Extend Monthly Loss, Treasury Yields Pare Monthly Gains: U.S. stock indexes erased early gains to close lower Thursday, a fitting end to a poor showing in September. The S&P 500 gained 0.5% early before fading mid-morning, with an early-afternoon recovery giving way to another bout of selling. The index finished the day down 1.2% and at session lows on broad weakness across all sectors. For the month, the S&P 500 fell 4.8%, its worst month since March 2020, amid concerns about the recovery, inflation pressures, the Fed’s plans to taper, and fiscal dysfunction in Washington. The 0.2% gain in the three months ended Thursday marked the weakest quarter since the first quarter of 2020. The Dow fell 1.6% on Thursday, 4.3% in September, and 1.9% in the third quarter. The Nasdaq edged 0.4% lower yesterday and for the quarter while posting a 5.3% decline for September. There were few new catalysts during the day, as a rise in jobless claims didn’t seem to weigh on the mood and the passage of a stopgap funding bill to avoid a government shutdown at midnight didn’t appear to provide a lasting boost to spirits. Treasury yields moved up and down throughout the day but began to slide late and closed near daily lows. The 2-year yield fell 1.4 bps to 0.28% but rose 7 bps for the month. The 5-year yield dropped 2.6 bps to 0.97% but rose 19 bps in September. The 10-year yield declined 2.9 bps to 1.49% but ended September 18 bps higher. The monthly increases were accumulated almost entirely after the Fed signaled tapering would like be announced in November and showed a rate hike was possible next year amid stronger inflation pressures.

Global risk markets limped into October following big September declines as investors remained concerned about the economic recovery, elevated inflation, and the state of fiscal affairs in the U.S. Markets in China and Hong Kong were closed for holidays but indexes elsewhere in the region declined. Europe’s Stoxx was down 0.3%, but near session highs following a steady recovery from earlier lows. Manufacturing activity improved in some smaller Asian economies based on September PMIs, although several remained in contractionary territory. The Eurozone’s PMI was notched down 0.1 in revision to 58.6, holding at a high level but marking a third monthly decline and a seven-month low. As investors awaited an update on the Fed’s preferred inflation metric, the latest report from Europe showed headline inflation rose from 3.0% to 3.4% in September while core price increases strengthened from 1.6% to 1.9%, the sharpest annual increases since 2008. Prior to the release of U.S. consumer income and spending data and the PCE inflation metrics, stock futures had reversed with European indexes and were up 0.3% at session highs while Treasury yields were modestly higher. In addition to the influx of economic data this morning, markets will be watching for a possible House vote on the Senate’s bipartisan infrastructure bill. The scheduled vote for Thursday was delayed due to a lack of consensus among House Democrats.

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