U.S. prices were unchanged in May while consumer spending rose moderately, a trend that could prompt the Federal Reserve to begin cutting interest rates this year.
The stability in the personal consumption expenditures (PCE) price index last month follows an unrevised 0.3% gain in April, the Commerce Department’s Bureau of Economic Analysis said Friday. In the 12 months to May, the PCE price index rose 2.6% after rising 2.7% in April.
Economists polled by Reuters forecast the PCE price index unchanged for the month and up 2.6% year-on-year. MARKET REACTIONS: STOCKS: U.S. stock futures were little changed after the report, up 0.3%. BONDS: Benchmark 10-year yields fell three basis points to around 4.27%; two-year yields fell four points to 4.69%. FOREX: The US dollar extended its losses against the yen and was last down 0.2% at 160.53 yen COMMENTS:
ART HOGAN, CHIEF MARKET STRATEGIST, B RILEY WEALTH, NEW YORK
When you compare what we got today with expectations, it’s very much in line and so the Fed will probably have enough comfort by the time of the September 18 meeting to cut rates for the first time.
What is remarkable is that the Fed had forecast a core PCE rate of 2.6% by the end of 2024, and it looks like we are already there.
If you’re looking for a reaction to the data, the key consideration for a reaction to that 2.6% core PCE is clearly a continued decline in Treasury yields, which is undoubtedly good for actions”.
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK
Personal income was a little higher than expected, but spending clearly fell, which is key for the Fed because it indicates lower inflation.
“The numbers (of the price index) are good and in line with expectations. This is good news. They show that inflation has peaked and is moving in the right direction. The question is whether the feds will start to change their tune on rate cuts.
I suspect they will want more proof, but it is becoming increasingly clear that inflation has peaked.
If inflation falls for another month, that would pave the way for a rate cut in September, despite the hardline stance taken by many at the Fed.
I don’t think inflation will get to 2% this year. That doesn’t necessarily mean the Fed can’t cut rates or ease monetary policy.
Otherwise, the risk of the economy entering recession in early 2025 becomes increasingly likely.
BRIAN JACOBSEN, ÉCONOMISTE EN CHEF, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN
After being virtually non-existent for a year, real personal disposable income has finally increased. I don’t think this is a sign of a change in trend. Spending has been nothing out of the ordinary. Even food and accommodation services have seen a decline in spending.
“The slowdown in inflation helps a bit. Lower inflation doesn’t mean prices are falling, but they’re not rising as fast. We’re seeing deflation in goods prices, with the goods price deflator down 0.1% from a year earlier. Services inflation was 3.9% year-over-year, which is about where it’s been since December. The Fed will see what it wants to see in these data, and that will leave everyone guessing about when the next taper will occur.
JAY WOODS, CHIEF GLOBAL STRATEGIST, FREEDOM CAPITAL MARKETS, NEW YORK
“This report is perfect: it gives the Fed the green light to taper in September and sets the stage for continued dovish rhetoric, which we hope to hear at the July meeting. It shows that the measures of the Fed are working and that a soft landing is still on the cards. Of course, there is a lot of data between now and September, but this strikes all the right chords for the Fed as it seeks to reduce its spending.
“The S&P 500 is on track to open at a record high. I’d also be watching the small-cap Russell 2000 today, if it rallies strongly it will be indicative of how the market has taken charge.
CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, N.C.
“This morning’s data was almost perfectly in line with consensus. You won’t learn much from this report. The inflation rate is slowing. The last number we saw, year-over-year, was 2, 7% It’s now down to 2.6% So the data is heading in the right direction The inflation rate appears to be slowing, so the Fed will be happy with this report, but I’m sure they’re expecting more – she wants certainty that we are going to move towards the 2% target. Even if we are going in the right direction, we are not getting there very quickly. The deceleration is happening at a much slower pace.
“I don’t know if this report is enough to prepare them to cut rates. But there’s nothing in this report that should worry them. So it’s a difference from earlier in the year.”
This report doesn’t really give us any new information. It’s more of a status quo. We still think the Fed will cut rates once this year and will do it in December, more because it wants to cut rates than because it has to.”
“If a car slows down from 60 miles an hour to 30 miles an hour, when it goes from 60 to 40 you notice it, but when it goes from 33 to 31, it’s not very exciting.
CAROL SCHLEIF, CHIEF INVESTMENT OFFICER, BMO FAMILY OFFICE, MINNEAPOLIS
Markets will breathe a sigh of relief that the PCE index didn’t really surprise one way or the other. This is still an indicator of a coasting economy, with hopes of reaching a more sustainable pace in the long term, and inflation still falling.
