Vital Statistics:
Stocks are flat this morning as we head into a 3 day weekend. Bonds and MBS are down.
Personal Incomes rose 0.4% in April, while personal consumption rose 0.8%. The PCE Price Index (the Fed’s preferred measure of inflation) rebounded in April to 0.4%. On an annual basis PCE inflation rose 4.4%. If you strip out food and energy, PCE inflation rose 0.4% on a month-over-month basis and 4.7% on a year-over-year basis.
While the PCE Price index did show an uptick in April compared to February and March, the annual rate is still working its way lower.
This will be the last PCE data before the June Fed meeting which takes place from June 13-14. We will get the May employment numbers and the May CPI before then, but the markets and the Fed-speak seem to be hinting at another hike. The Fed Funds futures are now handicapping a better-than-50% chance of another 25 basis points in June. The strong consumption numbers give them the excuse to move further away from the zero bound.
The FOMC minutes indicated that the Fed still has a tightening bias, and that comports with some of the statements from various Fed presidents over the past couple of weeks. About the only statement that indicated any sort of dovishness was this:
Participants also discussed several risk-management considerations that could bear on future policy decisions. A few assessed that there were upside risks to economic growth. However, almost all participants commented that downside risks to growth and upside risks to unemployment had increased because of the possibility that banking-sector developments could lead to further tightening of credit conditions and weigh on economic activity. Almost all participants stated that, with inflation still well above the Committee’s longer run goal and the labor market remaining tight, upside risks to the inflation outlook remained a key factor shaping the policy outlook. A few participants noted that they also saw some downside risks to inflation.
Even that isn’t much for doves to hang their hat on. The regional banking stress seems to have dissipated, so any resulting tightening of credit will probably fade as well. Problems in the CRE market seem to be mainly concentrated in the office sector, although the lower-tier retail spaces might have some issues as well. Rental inflation will be something to watch as we approach the peak in real estate prices a year ago and apartment completions remain elevated.
In other economic data, first quarter GDP was revised upward from an increase of 1.1% to 1.3%. Initial Jobless claims ticked up to 229k, and durable goods orders increased 1.1%.
Pending Home Sales were flat in April, according to NAR. “Not all buying interests are being completed due to limited inventory,” said NAR Chief Economist Lawrence Yun. “Affordability challenges certainly remain and continue to hold back contract signings, but a sizeable increase in housing inventory will be critical to get more Americans moving.” Unfortunately a lot of the housing starts and completions are in multi-family, not single family.
Consumer sentiment slipped in May, according to the University of Michigan Consumer Sentiment Survey. “Consumer sentiment slid 7% amid worries about the path of the economy, erasing nearly half of the gains achieved after the all-time historic low from last June. This decline mirrors the 2011 debt ceiling crisis, during which sentiment also plunged. This month, sentiment fell severely for consumers in the West and those with middle incomes. The year-ahead economic outlook plummeted 17% from last month. Long-run expectations plunged by 13% as well, indicating that consumers are concerned that any recession to come may cause lasting pain. That said, consumer views over their personal finances are little changed from April, with stable income expectations supporting consumer spending for the time being.”
This is interesting given that consumer spending remains robust. Expectations regarding future inflation fell to 4.2% after rising to 4.6% in April. Long-run inflationary expectations ticked up however, although they remain around 3%. This will concern the Fed, as it wants long-term inflationary expectations at 2%.
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