US Macro Data And Inflation Indicators Stir Market Expectations

The recent streak of weak US macroeconomic data took an unexpected turn yesterday with a GDP print that surpassed expectations, leading to a more hawkish outlook on future rate cuts. Today, the doves are hopeful for a piece of 'bad news' to bolster their narrative for cutting rates, but the latest data may not provide the support they seek.

The Federal Reserve's preferred inflation measure, Core PCE, came in slightly hotter than anticipated, rising 2.6% year-over-year, compared to the expected 2.5%. The headline PCE, however, dipped to 2.5%. Despite this slight decrease, the underlying data reveals a more complex picture.

Breakdown of Core PCE

Durable goods continue to experience deflation, dragging the overall Core PCE lower, while the cost of services remains on an upward trajectory. Particularly noteworthy is the so-called SuperCore PCE, which increased by 0.2% month-over-month, pushing the year-over-year rate to 3.43%. This marks the 50th consecutive monthly rise in SuperCore prices, with healthcare costs contributing significantly to this persistent inflation.

Income and Spending Trends

On a monthly basis, income growth fell short of expectations, rising only 0.2% compared to the forecasted 0.4%. Meanwhile, spending increased by 0.3%, aligning with predictions. However, on an annual basis, consumer spending continues to outpace income growth, which has led to a further decline in the savings rate.

Government Assistance and Savings Rate

The backdrop to these figures includes a notable rise in government handouts for the seventh consecutive month, which is particularly significant in an election year. Without these handouts, the savings rate would have experienced an even more pronounced drop.

Implications for Monetary Policy

Despite the hopes of dovish policymakers, the current data does not provide strong enough evidence to justify an imminent rate cut. The persistent rise in SuperCore prices, coupled with the ongoing imbalance between spending and income growth, suggests that inflationary pressures remain a concern.

In conclusion, the latest economic indicators present a mixed picture. While there are signs of easing in certain areas, the overall trend suggests that the Federal Reserve may need to maintain its cautious stance. The market will continue to watch closely for further data that could tip the balance in favor of either dovish or hawkish monetary policy adjustments.

By: Michael Figueroa