Sticky U.S. PCE Reinforces Hawkish Speech From Chair Yellen
- US inflation continues to track below the Fed’s 2% target as core PCE comes largely in line with expectations.
- Personal Spending and Personal Income data also came in line for the most part.
- US Dollar Indexedged slightly higher, but the move was short-lived.
Headline Personal Consumption Expenditures (PCE) came in at an annualized 0.8% (YoY) in July, which was in line with expectations for a 0.8% clip, but narrowed from a previous reading of 0.9%. Core PCE increased 1.6% (YoY) during the same period, ahead of expectations for a 1.5% print and in line with the previous reading of 1.6%. Personal Spending (+0.3%) & Income (+0.4%) matched expectations, while Real Personal Spending (+0.3%) beat expectations, with all the components receiving an upward revision for June.
PCE is not a big market mover in itself, but as it has strong implications for Fed policy, it may have broader implications for interest-rate expectations. Although the data releases does not take the Fed significantly closer to action, the improvement in household earnings strengthens the argument of a hot labor market and can be a boon for the case for a rate hike.
The stagnant price growth comes on the heels of Chairwoman Janet Yellen’s speech at the annual Economic Symposium at which she said that inflation and unemployment are nearing the Fed’s goals. This is certainly true on the employment half, especially as the labor force continues to strengthen. However, the Fed’s inflation target, as measured by Headline PCE of 2%, has tracked below the key objective since the target was clarified in January 2012. With the continued progress in the labor market and expected pickup in inflation, Chair Yellen mentioned that the case for a rate hike in the coming months has strengthened.
Here are the data affecting the US Dollar this morning:
- USD Personal Consumption Expenditure (JUN): +0.8% versus +0.8% expected, from +0.9% (y/y).
- USD Core Personal Consumption Expenditure (JUN): +1.6% versus +1.5% expected, from +1.6% (y/y).
- USD Personal Income (JUNE): +0.4% versus +0.4% expected, from +0.2% (m/m).
Chart 1: US Dollar Index 1-minute Chart (August 29, 2016 Intraday)
There was very limited reaction to the data during the immediate aftermath of the release. The US Dollar Index was only slightly higher, at 11,986 following the data, from 11,981 before. By the time this report was written, the pair was showing signs of reversing that edge higher. With FX volatility edging higher again, it’s the right time to review risk management principles to protect your capital.
--- Written by Omar Habib, DailyFX Research
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