Weaker consumer data and rising jobless claims push 10-year yield to 4.22%
Summary
Last week brought positive news on inflation, with the PCE index easing to 2.5% and the Core PCE index to 2.6%, both in line with expectations. However, signs of a slowing economy emerged, with weak housing data, an uptick in jobless claims, and weaker than expected consumer spending — resulting in the 10-year Treasury yield falling sharply to close the week at 4.22%.
PCE
The most anticipated report for the week was PCE (personal consumption expenditures), which came in as expected on both the headline and core numbers. However, there were other items in the report that warrant a closer look.
Personal income was well ahead of expectations at 0.9% on the month, yet personal consumption expenditures were well below expectations, declining 0.2%. Given the higher-than-expected income and lower-than-expected spending, the personal savings rate jumped to 4.6%, up from a previous reading of 3.5%. This slowdown in spending may be a result of the concerned consumer — as reflected in the recent consumer sentiment/confidence surveys — or it could be weather related, as many economists are pointing to a cold January. Regardless, with yields down and equity markets responding by selling off, especially technology, markets are starting to worry about the U.S. potentially facing a scenario of slower growth and elevated inflation.
Source: Bureau of Economic Analysis
Other key economic releases
There were several other notable releases over the week, especially related to the consumer. Although all releases missed expectations, most pointed to signs of weakening consumer confidence with new home sales, pending home sales, and durable goods (excluding transportation). It is worth highlighting that pending home sales dropped to the lowest level on record. Although housing represents a small part of GDP, housing volumes reverberate through the economy. In addition to these reports pointing to a slowing consumer, jobless claims rose to 242,000, also contributing to investor concerns.
The week ahead
There will be a number of releases next week, but the jobs report will take center stage. Tariffs on Canada, Mexico, and China are set for March 4, however, that situation remains fluid.
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