Headline PCE in May fell .1% m/o/m as expected while the y/o/y gain moderated to a rise of 1.4% (slowest since November) from 1.7% in April as the energy influence wanes. Core inflation is moderating as well with a .1% m/o/m rise for a 2nd month. The y/o/y gain of 1.4% was as forecasted vs 1.5% in April and the lowest print since December. There still is the differential between falling goods prices (down .2% led by a 2.5% y/o/y drop in goods) and rising services inflation (up 2.2% y/o/y but seeing a slowing pace of gains).
Bottom line, the slowing inflation trend on a rate of change basis certainly pressures the Fed because of their self imposed target and obsession with 2% inflation. Real rates are still negative however and their balance sheet is still at peak size which combined with the Fed’s econometric unemployment red light flashing will have them attempting further tightening whether you agree with it or not. Their timing of course is suspect but that’s what you get when you miss an entire cycle before deciding to tighten. Maybe, they hold off on another rate hike because of the inflation stats but they seem dead set on QT and that is still another source of monetary constraint.
Personal income in May rose .4% m/o/m, one tenth more than expected but April was revised down by one tenth so a push. The y/o/y gain was 3% which is the slowest since December. Digging within saw private sector wage/salary growth up 2.9% y/o/y, a 4 month low. Thus, the hoped for improvement in wage gains is still elusive. That said, it still is very difficult finding good employees, certain sectors are seeing faster wage growth and maybe the aggregate wage data is being influenced by a mix issue. More baby boomers are retiring while most of the new entrants are college students who see slower wage growth in the beginning of their working careers.
Consumer spending was up .1% m/o/m after a .4% rise in April as expected. The internals were mixed as spending on goods declined (down 3 of the last 4 months) but was offset by a rise in spending on services which is getting more and more dominated by healthcare. This led to a 4 tenths increase in the savings rate to 5.5%, the most since September.
SAVINGS RATE back 25 years
We will get another estimate from the Atlanta Fed for Q2 GDP which currently stands at 2.9%. The NY Fed has its estimate at 1.9%. Either way, economic growth remains mediocre at the same time monetary conditions are beginning to tighten. As for the market reaction, the 2 yr note yield is less than 1 bp from the highest level in 8 years and the 10 yr yield is bumping up against yesterday’s intraday high of 2.28% as European bonds turn red.