Fresh inflation data provides a welcome update as consumers feel the squeeze

PCE brings a pleasant lack of surprise

The Fed’s preferred metric to gauge inflation, PCE, matched expectations on Friday. On an annual basis, PCE rose 2.60% both on a headline and core level (which excludes food and energy) this May, reaching the slowest yearly increase since March 2021. From month to month, headline PCE remained unchanged from April and rose just 0.10% when excluding food and energy. Given this release’s general lack of surprises, markets saw little movement in the hours immediately following the publication, with Treasury yields shifting only a few basis points.

This report from the Bureau of Economic Analysis should be welcome news for the Federal Open Market Committee, as the Committee evaluates when to begin cutting interest rates. The trend of slowing monthly increases in PCE over the past three years indicates that elevated rates have been doing their job; what’s next is determining when that job will be deemed complete.

As of Friday morning, CME futures markets were still pricing in two quarter-percent interest rate cuts by the end of 2024.

Election and market dynamics

Last Thursday evening, President Joe Biden and former President Donald Trump faced off in their first debate leading up to the 2024 presidential election. Markets did not respond in any material way to the event, though we anticipate more questions and market reactions as we get closer to the national party conventions.

Over the weekend, French parliamentary elections were held, and results were less conclusive in favor of the far right than originally anticipated. Markets appear to be pricing in a higher likelihood of a hung parliament, reducing the probability of extreme policies in either direction by the French parliament.

Finally, the U.K. heads to the polls this week on July 4, with markets anticipating the Conservative Party to potentially lose its majority. As another parliamentary system, markets will watch closely, not just for the winner of the polls, but also for the margin of victory to determine future policy paths and implications.

Consumers slower to spend

Friday’s data publication also brought new consumer spending and income news, with neither figure exactly matching market expectations. In May, personal income went up 0.50% from April (versus expectations of a 0.40% increase), led by increases in compensation and government social benefits. Personal spending went up only 0.20% (below expectations of 0.30% growth) from April to May, bolstering the personal savings rate to 3.90% (up from 3.70% in April). Despite slowing price growth and increasing wages, consumers are still grappling with inflation pressures, holding onto more cash to feel more secure.

Fuel prices increase

Crude markets rose last week amid escalating tensions in the Middle East between Israel and Hezbollah, an Iran-backed militia group. The Pentagon shifted forces toward Lebanon in anticipation of potential conflict, and markets are monitoring the situation, raising concerns about potential attacks on fuel facilities. Brent crude surpassed $87.00/bbl last week and was sitting roughly 12.00% up year-to-date on Friday, with gasoline (RBOB) contract prices up almost 21.00% since the start of the year.

The week ahead

Despite the Fourth of July holiday, significant economic data releases are still on the docket. June employment figures drop on Friday, while minutes from the Fed’s June meeting will be released on Wednesday afternoon, providing insights into future interest rate policies. Chair Powell will speak in Portugal on Tuesday at the ECB Forum on Central Banking.