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REPEAT: MNI 5 THINGS: Upside Risk To US Core PCE Price Index

Repeats Story Initially Transmitted at 14:49 GMT Jun 28/10:49 EST Jun 28
By Holly Stokes
     WASHINGTON (MNI) - The Personal Income and Outlays report for May will be
released Friday, with the median forecast among analysts in an MNI survey
calling for a 0.4% rise in both personal spending and personal consumption,
alongside a 0.2% rise in the core PCE price index.
     Ahead of the release, we outline five themes for particular attention:
--HISTORY OF UNDERESTIMATING CORE PCE PRICE INDEX
     Analysts are expecting core PCE price index to rise 0.2% month/month in May
for the fourth month in a row. However, recently analysts have shown a tendency
to underestimate the core PCE price index. In the past year, analysts have
underestimated the index five times, and only overestimated it three times.
While there is an upside risk to analysts' estimate of +0.2%, it is worth noting
that analysts usually underestimate by a only small degree - missing by just
0.1pp in the past year.
--PCE PRICE INDEX YEAR/YEAR COULD REACH FED TARGET
     With a forecast for core PCE price index to rise 0.2% month/month, many
analysts expect the year/year pace to accelerate to 1.9%. However, depending on
the strength of the unrounded core PCE price index, a very strong 0.2%
month/month could yield a 2.0% year/year gain. And, given analysts' history of
underestimates, a 2.0% year/year could be a real possibility. This would be the
first time that the Fed's preferred inflation measure hits the 2.0% target since
April 2012. If a 2.0% gain is realized, markets will likely take this as further
confirmation for four hikes in 2018 and short-end rates markets will sell-off.
However, with all eyes on the Nonfarm Payrolls Report next week, market reaction
will likely be muted.
--RETAIL SALES SUGGEST SPENDING STRONG
     In May, retail sales jumped 0.8%, twice the gain that analysts had
forecasted. This jump in consumption was boosted by underlying strength in the
core retail sales categories, which feed directly into PCE. Consequently,
analysts are expecting May personal spending to show robust growth, with the
median forecast landing at a 0.4% gain and many analysts predicting a 0.5% rise.
Following a 0.6% increase in April, this would set the second quarter PCE up for
a strong rebound after a lackluster first quarter. However, spending on services
remains more of a wild card. In particular, CIBC points to a potentially weaker
utilities print in May, after the Industrial Productions report showed a
softening after two months of strong gains. 
--SAVINGS RATE COULD CONTINUE DOWNWARD TREND
     Last month, attention returned to the savings rate, as the measure dipped
back to 2.8% after hovering at or above 3.0% for the prior three months. In
2017, analysts were quick to note the rapid decline of personal savings relative
to disposable income, as the measure fell to potentially dangerous low levels.
Amidst high consumer confidence, there has been a recent negative relationship
between average hourly earnings and the savings rate, where consumers appear to
be spending at a faster rate than their incomes rise. Analysts expect this trend
to continue in May, with the large 0.8% gain in retail sales suggesting no pull
back in spending. 
--ENERGY TO BOLSTER PCE PRICE INDEX
     Headline PCE Price Index is expected to rise 0.2% month/month and lift the
year/year up to 2.2%, with energy prices a key factor. The already released 0.9%
gain for May CPI energy suggests another month/month gain for PCE price index
energy goods and services, albeit weaker than the month prior when CPI energy
rose 1.4% and PCE price index energy rose 1.5%. Further, year/year is expected
to receive a considerable lift from a positive energy print on base effects, as
May of 2017 saw a dramatic 3.1% fall in PCE energy prices month/month. 
--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com

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