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US Core PCE Misses And Spending Disappoints As Savings Revised Higher

DATA REACT
  • Core PCE inflation was softer than expected in May, rising +0.35% M/M vs average consensus of +0.42% M/M.
  • In doing so, it keeps core PCE inflation running in an unusually stable range, having been between 0.30-0.34% in the prior three months and with minimal revisions to March and April, with the widening wedge between CPI and PCE measures largely down to CPI strength in airfares and OER.
  • Nominal incomes were broadly in line with expectations, but spending suffered more than expected, sliding -0.4% M/M in real terms (cons -0.3%) after April was revised down from +0.7% to +0.3% M/M.
  • The weakness in spending follows the surprise downward revision to +1.8% annualized in yesterday’s third Q1 GDP print, and comes with upward revisions to the savings ratio such that it hasn’t cranked down to new lows since 2008 at 4.4% in April as originally thought but rather has stabilised at 5.4% in May.
  • Skittish market reaction to the data with ECB headlines on its anti-fragmentation tool also hitting, but it doesn’t materially change today’s risk-off theme of a sizeable belly-led rally in Treasuries (5YY -7.5bps) and Fed hike expectations being trimmed to 67bps for next month’s FOMC and 178.5bps over the four meetings to year-end (-10bps from yesterday).

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  • Core PCE inflation was softer than expected in May, rising +0.35% M/M vs average consensus of +0.42% M/M.
  • In doing so, it keeps core PCE inflation running in an unusually stable range, having been between 0.30-0.34% in the prior three months and with minimal revisions to March and April, with the widening wedge between CPI and PCE measures largely down to CPI strength in airfares and OER.
  • Nominal incomes were broadly in line with expectations, but spending suffered more than expected, sliding -0.4% M/M in real terms (cons -0.3%) after April was revised down from +0.7% to +0.3% M/M.
  • The weakness in spending follows the surprise downward revision to +1.8% annualized in yesterday’s third Q1 GDP print, and comes with upward revisions to the savings ratio such that it hasn’t cranked down to new lows since 2008 at 4.4% in April as originally thought but rather has stabilised at 5.4% in May.
  • Skittish market reaction to the data with ECB headlines on its anti-fragmentation tool also hitting, but it doesn’t materially change today’s risk-off theme of a sizeable belly-led rally in Treasuries (5YY -7.5bps) and Fed hike expectations being trimmed to 67bps for next month’s FOMC and 178.5bps over the four meetings to year-end (-10bps from yesterday).