U.S. prices were unchanged in May, while consumer spending increased moderately, a trend that could prompt the Federal Reserve to start cutting interest rates this year.
The stability in the personal consumption expenditures (PCE) price index last month followed an unrevised 0.3% gain in April, the Commerce Department’s Bureau of Economic Analysis said Friday. In the 12 months through May, the PCE price index rose 2.6% after rising 2.7% in April.
Economists polled by Reuters had 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 right in line and so the Fed will probably have enough comfort by the time of the September 18th meeting to cut rates for the first time.
What’s notable is that the Fed had forecast a rate of 2.6% for core PCE by the end of 2024, and it looks like we’re 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 evidence, but it is becoming increasingly clear that inflation has peaked.
If inflation falls for another month, it will pave the way for a rate cut in September, despite the hardline stance taken by many Fed members.
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 seeing the economy enter into recession at the beginning of 2025 becomes more and more 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 little. Lower inflation does not mean that prices are falling, but that they stop rising as quickly. We are seeing deflation in goods prices, with the goods price deflator having down 0.1% from the previous year Services inflation stood at 3.9% year-on-year, roughly where it has been since. December. The Fed will see in this data what it wants to see and that will leave everyone guessing as to when the next cut will be.
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 the dovish rhetoric to continue, which we hope to hear at the July meeting. It shows that the Fed’s policies are working and that a soft landing is still on the cards. Sure, there’s a lot of data between now and September, but this hits all the right notes for the Fed as it looks to taper.
“The S&P 500 is on track to open at a record high. I would also watch the Russell 2000 small cap index today, if it recovers strongly it will be indicative of how the market has taken things in hand.
CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, N.C.
“This morning’s data was almost exactly in line with consensus. You’re not going to 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 moving in the right direction. The inflation rate appears to be slowing, so the Fed will be pleased with this report, but I’m sure they’re looking for more – they want certainty that we’re moving toward the 2% target. Even though we’re moving in the right direction, we’re 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 so 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 in either direction. It’s still an indicator of a freewheeling economy, with hopes of reaching a more sustainable pace in the long run, and inflation still falling.
