MNI 5 Things: Expect Jan US Y/Y Core Prices To Remain Stable

5 Things To Look For In US Jan Personal Income Report

By Sara Haire and Holly Stokes

     WASHINGTON (MNI) - The Personal Income report will be released Thursday,

with the median forecast among analysts in an MNI survey calling for a 0.3% gain

in core PCE price index, a 0.3% gain in personal income, and a 0.2% gain in

current dollar PCE.

     Ahead of the release, we outline five themes for particular attention. 

--LOW RISK OF SURPRISE FOR CORE PCE PRICE INDEX, HIGHER FOR PERSONAL INCOME

     MNI calculations and recent historical data show that the core PCE price

index should hold little surprise, with analysts' median estimates only missing

twice in the last year. Both of these misses were by a small 0.1% and in

different directions, showing no clear risk to the expected 0.3% gain. However,

analysts' personal income track record is less exact. In the past 12 months,

analysts have underestimated and overestimated four times each. While these

misses are generally only by 0.1%, they have overestimated by as much as 0.4% --

suggesting a potential downside risk to personal income.

--STRONG CORE PCE PRICE INDEX M/M, BUT STABLE Y/Y

     Based on January's CPI and PPI reports, the core PCE price index is

expected to post a 0.3% m/m gain, which would be the largest monthly gain since

January 2017. Given that core CPI's 0.3% m/m gain led to stock volatility and

sell-offs, a similar print for the core PCE price index could yield some market

anxieties, but  participants seem to be largely unfazed by the current

expectation. Additionally, due to negative base effects, a 0.3% monthly gain

would result in the y/y holding steady at 1.5% or ticking up to a still soft

1.6%, which should help further ease concerns of overheating. This stability is

likely as core PCE y/y and core CPI y/y generally follow the same trend.

--SHIFTING EXPECTATIONS FOR RATE HIKES

     While January's y/y core PCE price index would still land well below the

Fed's 2.0% target, recent monthly inflation data suggest an upward trend. As

negative base effects from early last year start to roll out, a continued trend

of upward inflation should yield a print much closer to target. A continued nod

of inflationary strength could be grounds for FOMC participants to re-evaluate

their projected rate path at the March meeting, as Chairman Powell pointed out

in his testimony before the House on Tuesday. Further, as inflation data

continues to heat up, markets are beginning to price in four rate hikes, and if

this continues to spike, markets will start moving past four hikes and begin

pricing in either five rate hikes or hikes that are more than a quarter basis

point. 

--CONFLICTING EMPLOYMENT DATA GIVES RISK TO PERSONAL INCOME

     Analysts' forecasts for personal income vary greatly, ranging from a 0.1%

decline to a 0.5% gain, due to to conflicting data released in the January

Nonfarm Payrolls Report. In January, average hourly earnings (AHE) rose by 0.3%

m/m, making the y/y pace the largest increase in eight years. Personal income's

y/y rate has been following AHE y/y steadily in recent months. This, and 18

states raising minimum wage, make many analysts hopeful that personal income

will surge.  However, January also saw a 0.6% m/m fall in the average workweek,

mitigating some of the strength in wage gains. The last time that the average

workweek shrank by 0.6% was in April 2013, when average hourly earnings also

rose by 0.3% m/m, which only led to a 0.1% m/m increase in personal income.  If

the upcoming report follows suit, this would be the softest personal income

print since June 2017. While the market's reaction could be muted due to the

impending Powell testimony, a downside surprise could push Treasury futures to

pick up from the midweek selloff, while yields could fall in a "risk-off" move.

Equities have been acting unpredictably recently, but this would potentially

push them to firm.

--PERSONAL SPENDING COULD SURPRISE 

     While most forecasts call for current dollar PCE, or personal spending, to

come in on the low side due to January's unexpected decline in retail sales,

there could be an upside risk. Medical services and commodities in the CPI

report saw continued increases likely due to the aggressive flu season.

Government transaction receipts, specifically Social Security expenditures are

also likely to have picked up in January, adding to personal income, but also

consumption. These positive factors could translate into a higher level of

personal spending, while also pushing up core PCE inflation, especially since

hospital services account for 7.8% of consumption compared to the smaller 2.2%

they make up in CPI, as noted by Capital Economics. However, if personal

spending comes in soft, the savings rate may see a bounce back from the 2.4%

rate in December, which was the lowest since November 2005.  Reaffirming this is

the upward revision to the savings rate in the 4th quarter GDP report released

Wednesday. Even so, the savings rate remains well below its year ago level of

3.7%.

--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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