Market Wire: Fed's preferred inflation measure accelerates less than feared, marginally undermining the dollar

The Federal Reserve’s preferred measure of underlying inflation held well above target last month while other indicators pointed to softness at the household level, raising concerns about stagflationary conditions in the broader US economy. Data released by the Bureau of Economic Analysis this morning showed the core personal consumption expenditures index rising 0.2% percent in April from the prior month, undershooting market forecasts for a 0.3% increase. On a year-over-year basis, core price growth held at 3.3%, aligning with economist estimates. The overall personal consumption expenditures index climbed 0.4% relative to the prior month, and was up 3.8% from a year ago, matching the consensus estimate, and marking its biggest two-month acceleration since 2021.

Personal income stagnated in nominal month-over-month terms—missing forecasts that had been set at 0.4 percent—and inflation-adjusted household spending climbed just 0.1 percent, suggesting that a worsening in real incomes may be crimping overall consumption levels.

Separate data showed the US economy grew more slowly than previously estimated in the first quarter, while a surge in aircraft orders flattered factory orders last month. A second revision in first-quarter gross domestic product from the Bureau of Economic Analysis showed output expanding at an 1.6% annualised rate—well below the 2.0% previously reported—as personal consumption and investment contributions were adjusted lower. Durable goods orders were up 7.9% in April from an upwardly-revised 1.3% in the prior month, but the gains were largely restricted to the transportation sector after a large aircraft sale boosted Boeing’s order book, with transportation-excluded new orders up 1.1% after posting a similar gain in March.

Front-end Treasury yields are slipping and the dollar is retreating as market participants pull back on bets that the Fed will deliver at least one rate hike before the end of the year. Over the last two days, a number of Fed officials, including Lisa Cook, Philip Jefferson and Neel Kashkari have joined their counterparts in expressing deep unease on inflation risks—suggesting that incoming chair Kevin Warsh will struggle to align the rate-setting committee in delivering rate cuts in the near term—but, if sustained over a period of months, data releases like those seen this morning could help make the case for an eventual return to an easing trajectory.

In the background, the weekend’s Mideast peace-driven relief rally is continuing its slow unwind, with a series of US military strikes on Iran sapping confidence in an imminent normalisation of energy flows through the Strait of Hormuz. Both global oil benchmarks are up roughly 3% from yesterday’s close, equity futures are pointing to modest losses at the open, and most major currencies are on the defensive against the dollar.