MNI DATA PREVIEW:Core PCE Price Index Rise To Lock in Dec Hike

By Holly Stokes

HIGHLIGHTS: 

- Core PCE price index to rise 0.2% for first time in six months after a string

of 0.1% gains. 

- Year/year core PCE price index to edge up to 1.4%, while still below Fed

target, should lock in December hike. 

     - Personal spending expected to rise a healthy but more modest 0.3% after

September's hurricane driven 1.0% surge.

- Personal income forecast to increase 0.3%, but could be softer due to

October's flat average hourly earnings.

- Analysts worry about downward trend of savings rate, reflecting booming equity

market.

WASHINGTON (MNI) - Based on the October CPI and PPI reports, the PCE core price

index is forecast to increase by 0.2% month/month for the first time in six

months, translating to a 1.4% year/year rise - a three month high, analysts

estimates ahead of Thursday morning's report showed. 

     While the Fed's preferred measure of inflation is expected to remain well

below their 2.0% target, analysts expect that the modest improvement should help

assure more dovish-leaning policymakers and further the likelihood of the

already-priced-in December hike. 

     Analysts are now also turning their attention to rate hikes in 2018, with

CIBC stating that if core PCE inflation continues, this upward trend should

allow for three more rate hikes between now and the end of 2018. Confident in

oncoming strength, Amherst Pierpont notes that market participants may soon need

to price in a "more realistic scenario" for 2018 and beyond, explaining that

while the fed funds futures curve is priced for three hikes between now and the

end of 2019, dots project six and Amherst believes there could even be as many

as eight.  

     Separately, analysts expect October personal income and personal spending

to both rise 0.3%.

     Last month, personal spending surged 1.0% on the back of hurricane-led

vehicle replacement and high gas prices. After a continuous stream of

hurricane-impacted data, analysts finally expect a return to normalcy with

October posting a more modest 0.3% rise in nominal spending. 

     While personal spending is expected to cool off from September, there are

still several signs of positive growth that point to a healthy, albeit softer,

gain. Societe Generale notes that while unit auto sales may have fallen in

October, auto dealer receipts rose 0.7% in the month's retail sales report,

which should help boost spending on durables. Capital Economics echoes this

confidence in durable goods spending, estimating a 0.6% rise for the category. 

     Analysts also look to the month's retail sales report's control group

showing a 0.3% rise - suggesting solid consumption in goods was less affected by

transitory factors. Capital Economics also believes that strength may come from

service consumption due to higher utilities spending. 

     Personal income is expected to have increased 0.3%, slightly softer than

September's 0.4% pace.  Analysts such as BMO justify the continued gain as the

result of healthy job growth. Barclays even believes that personal income may

have maintained a 0.4% rise, led by a 0.4% gain in wages and salaries and a 0.3%

increase in proprietors' and rental income. However, CIBC is less certain of

this continued strength, stating that given the flat reading for average hourly

earnings in the October Nonfarm Payrolls report, income growth likely increased

a softer 0.2%. 

     If analysts such as JP Morgan are right that spending may modestly outpace

income growth, the savings rate will decline further, continuing a somewhat

worrying downward trend. BMO elaborates that the September's savings rate was

already a decade-low, reflecting the wealth effect from an escalating equity

market. 

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

[TOPICS: MAUPR$,M$U$$$]