The Market Today

Spending Trajectory Slightly Better than Expected as Incomes Improve, Inflation as Expected with YoY Core PCE Down to 1.4%

by Craig Dismuke, Dudley Carter

Today’s Calendar – Spending Trajectory Slightly Better than Expected as Incomes Improve, Inflation as Expected with YoY Core PCE Down to 1.4%: In the early morning data, personal incomes rose a better-than-expected 0.4% in July after the metric showed no change in June. It was the strongest month for income gains since February’s 0.5% gain. Within the income figures, wages rose 0.5%, consistent with the June pace, and investment income rebounded. After falling 1.7% in June, investment income rose 0.6% on a recovery in both interest and dividend income. The growth in incomes outpaced the growth in tax and nontax payments, leaving disposable incomes higher by 0.3%. Spending rose less than expected in July on both a nominal and real basis but the two-month cumulative spending results were better than expected after positive revisions to the June report. Nominal personal spending was up 0.3% in July, expected +0.4%, but June’s initial estimate of a 0.1% increase was revised to +0.2%. It was the strongest level of spending since March and the second strongest of 2017. Adjusting for inflation, spending rose 0.2%, expected +0.3%, but June’s initial estimate of no changed was revised to +0.2%. The savings rate ticked lower for a second month to 3.5% which represents the lowest level since December.


Along with the personal income and spending data, the BEA released its latest results for PCE inflation. The Fed-favorite PCE inflation index matched estimates at both the headline and core levels. Prices in both measures rose 0.1% MoM and 1.4% YoY. The 1.41% YoY rate of core inflation was 0.1% weaker than June’s 1.51% rate and the slowest pace since December 2015. While unlikely to impact the Fed’s expected September announcement on the balance sheet, the incoming inflation data will be the primary driving force behind whether the Fed is able to execute the third 2017 rate hike included in its current projections.


Initial jobless claims rose 1k last week to 236k, a slightly better result than the 238k expected by economists. The steady data dropped the 4-week average for claims to 236,750, the lowest since the middle of May. Continuing claims from two weeks ago improved from 1.954MM to 1.942MM. The claims data continue to signal a healthy labor market.


Later this morning, pending home sales data is expected to show a second consecutive month of increased contract activity. This would mark for the first two-month streak of positive results since September and October of last year.


Overnight Activity – Euro Strength May Force More Modest ECB Tightening: Sovereign yields are mixed across Europe as global equities have firmed. The Dollar has added to yesterday’s gains and gasoline prices have shown no signs of slowing their steep ascent. European assets showed little reaction to stronger-than-expected headline inflation in the Eurozone as the YoY core rate remained unchanged at 1.2%. The lack of significant inflation pressures in the Eurozone continues to serve as a contrarian indicator of a significantly more hawkish ECB. The recent run higher in the Euro may also keep the ECB from quickly becoming less accommodative. A Reuters report earlier this morning quoted a source familiar with ECB discussions, “The exchange rate has become a bigger issue. It is now less favorable for an exit and a stronger argument for a muddle-through option.” As the report hit the wires, European stocks jumped, yields there moved lower, and the Euro tumbled against the Dollar. Earlier in the session, Asian stocks had generally improved after China’s Manufacturing PMI topped estimates but the Non-manufacturing index slipped to its weakest level since May 2016. In the U.S. ahead of this morning’s economic data, Treasury yields had edged higher and the Dollar erased nearly all of its cumulative loss since Jackson Hole. Equity futures were positive and gasoline prices were up another 5.5% overnight and are now up 25% since last Wednesday.


Yesterday’s Trading Activity – The Dollar Rallied with Stocks, Treasury Yields Inched Higher, Gasoline Prices Extended Their Climb: U.S. stocks overcame some early negativity and all three major indices moved higher Wednesday. The Nasdaq led the gains with a 1.05% rally and the S&P’s tech sector led the broader index to a 0.46% gain. The Dow climbed a more modest 0.12%. Pre-market futures trading had shown a rather subdued response to ADP’s stronger-than-expected private payroll data and the bigger-than-expected upward revision to 2Q GDP. However, momentum in actual trading strengthened within the first 30 minutes and the major indices peaked with just over an hour to go before the closing bell. U.S. Treasury yields did move higher immediately after the solid morning data but fell back to close near their daily lows. Between the 2-year and 7-year parts of the curve, yields rose roughly 1 bp. The 10-year yield rose less, up just 0.2 bps to 2.13%. The Dollar climbed for almost the entire session and ended near its daily high. The greenback’s boost began overnight as the Euro reversed sharply lower after touching $1.20 on Tuesday for the first time since January 2015. The solid U.S. economic data drove the next leg higher for the currency. Keeping an eye on energy commodities, the effect of Harvey’s destruction showed no signs of letting up. Gasoline prices rose more than 7% to their highest level since June 2015 as U.S. crude fell roughly 1%.

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