Softer-than-feared US inflation despite robust spending
The desk interprets the recent US inflation data as a noteworthy pivot point that dampens immediate rate hike expectations, supporting the view held by NY Fed President John Williams that further tightening is not urgent. Recent figures show the core PCE deflator at 0.2% month-on-month for August, below forecasts of 0.3%, which along with downward revisions to the previous month, indicates a more favorable outlook on inflation trends. Per the full note , this data shift could temporarily ease pressure on the Fed to act, with markets pricing in only 9 basis points for the upcoming October FOMC meeting compared to 18 basis points prior to the report.
What the desk is arguing
The desk believes that the softer US inflation numbers may lead to a pause in the Fed's tightening cycle in the near term. Per the full note , inflation undershooting expectations not only creates a more balanced economic outlook but also supports comments from Fed officials regarding the need for caution.
Specifically, the core PCE deflator showed a month-on-month increase of just 0.2%, while the annual rate clocked in at 3%, significantly lower than the consensus of 3.3%. This trend is important as it suggests that inflation might be trending towards the Fed's target of 2%, as evidenced by the recent 3-month annualized rate also landing at 2%.
Where it sits in our coverage
Our current consensus target for USD/EUR is 1.075, within a range of 1.04 to 1.12. Notable firm forecasts include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This interpretation appears to align closely with the projections set by jpmorgan and diverges from the bearish stance of bofa, suggesting our position is at the higher end of the spectrum as markets digest the latest inflation data.
How other firms see it
jpmorgan and credit suisse share an aligned view, anticipating that inflation trends may prompt a slower pace of Fed tightening. Conversely, firms like bofa express a more cautious outlook, expecting continued pressure for rate hikes.
Traders should also keep an eye on the EUR/USD trajectory, especially in light of recent comments from ECB officials, which could further impact market sentiment regarding dollar strength or weakness.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US inflation softer than expected, reducing immediate rate hike pressure.
- 02Core PCE deflator at 0.2% MoM, supporting balanced economic outlook.
- 03Market now pricing only 9 basis points for October FOMC rate change.
Market implications
Watch for any shifts in October FOMC expectations as data evolves. A key level to monitor is the 0.2% threshold on the core PCE, which could influence future Fed communications. Positioning in the USD will likely respond to any further downward surprises in inflation.
Risks to this view
Should inflation metrics reverse course, particularly if month-on-month figures unexpectedly rise above forecasts, it would trigger reconsideration of the Fed's rate pause and could lead to readjustments in market expectations.
Older quick take Quick take Published 14:16 United States Softer-than-feared US inflation despite robust spending Cooler-than-feared inflation supports the NY Fed President John Williams' assertion that there is no immediate rush to hike rates again, even though more tightening will likely be required in time. Meanwhile, revisions to household income and spending data suggest the US economy is in a better balanced position than thought The core PCE deflator, the Fed's favoured inflation measure, was lower than expected for August, indicating the economy may be in better balance Inflation undershoots expectations The US personal spending and income report has generated quite a sizeable market reaction with the Fed's favoured inflation measure, the core PCE deflator, coming in at 0.2% month-on-month in August versus expectations of a 0.3% MoM increase. There were also downward revisions to July's print, which is now 0.1% MoM versus the 0.2% figure initially reported.
This was all helped by calculation methodological changes to the likes of portfolio management fees, software and some healthcare. The result is the annual rate of core inflation coming in at 3% versus the 3.3% consensus forecast. It is still well above the 2% target, but the month-on-month trajectory now looks much better for tracking towards 2% – the 3M annualised rate is in fact now 2% (see chart below).
The black line on the chart signals 0.17% MoM, which is what we need to average over time to bring the annual rate of inflation to 2%. Today’s outcome supports the NY Fed President John Williams’ comments yesterday that there is no immediate urgency for another rate hike, and we now have only 9bp priced for the October FOMC meeting versus 18bp at the beginning of yesterday. The December FOMC meeting now has a cumulative 29bp priced versus 39bp at the close on Monday.
Longer-dated Treasury yields reacted more modestly with 10Y yields 2bp lower. Core PCE deflator metrics Source: Macrobond, ING "> Source: Macrobond, ING Spending and income profile looks healthier Meanwhile, nominal spending rose 0.9% MoM in August, as expected given the strong retail sales report. With inflation coming in lower, this means real (volume) spending growth was firm (+0.6%MoM) and changes to the time series have contributed to second-quarter GDP growth being revised up to 2.2% from 1.5%.
Within that report, consumer spending was revised 0.4pp higher, but it was gross private investment, which was revised up 1.9pp, that was the main driver, while lower government spending was no longer quite so much of a drag. Real household disposable income (chained 2018 US$) Source: Macrobond, ING "> Source: Macrobond, ING The monthly household income number was soft with August's print showing income growth of just 0.2% versus the 0.5% MoM rate expected with July revised lower. As a result, the household savings ratio dropped half a percentage point to generate a strong nominal spending number.
Nonetheless, there have also been significant revisions to this income series. Real household disposable income under the old methodology had flat-lined for 18 months. Now, as the chart above shows, it has been trending higher, albeit weakly.
Overall, the report shows a better balance in the US economy and suggests that the middle and lower income households, for whom income is so critical to spending power given the lack of financial assets, have been under less financial pressure than feared. With the inflation profile looking a little better too, this is all welcome news. US Spending Inflation Income Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives.
The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author James Knightley Chief International Economist, US Older quick take
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