Market Wire: Underlying US inflation meets expectations and consumption rises, supporting prevailing Fed bets

The Federal Reserve's preferred inflation measure avoided an unruly acceleration last month, while personal income and spending both picked up—a combination that validates the higher-for-longer message embedded in last week's decision without forcing the committee's hand. A September hike remains on the table, but is far from a certainty.

Data released by the Bureau of Economic Analysis this morning showed the core personal consumption expenditures index rising 0.3% month on month, with the year-over-year rate edging up to 3.4% from 3.3%. Both figures landed precisely on consensus.

The overall personal consumption expenditures index climbed 0.4% relative to the prior month, and was up 4.1% from a year ago, running in line with the 4.1% consensus estimate as gasoline prices rose at a faster/slower rate than anticipated.

Personal income rose a slightly faster-than-expected 0.7% month-over-month, and inflation-adjusted household spending climbed 0.3%, with both handily beating expectations that were set closer to 0.4% and 0.2%, respectively.

Separate reports showed the economy expanding at an annualised 2.1% pace in the first quarter—faster than previously estimated—initial jobless claims coming in slightly below expectations, and non-defence, non-aircraft capital goods orders rising 1.6% after declining by 0.7% a month earlier: numbers that, taken in sum, point to a US economy continuing to grow at a rapid clip, outperforming most of its global counterparts.

Front-end Treasury yields are pushing slightly lower and the dollar is paring its gains as market participants remove tail risk hedges.

With oil prices rapidly converging with pre-war levels and producer inflation expectations coming down, we suspect the print may represent the high-water mark for imported cost pressures in the US economy. Overall price growth remains above target, but a slow-motion disinflation process should get underway in the coming months, giving the front end of the yield curve room to rally as the most aggressive tightening scenarios are priced out. Against this backdrop, the dollar’s recent gains look vulnerable to a jawboning effort from other members of the Federal Open Market Committee in the weeks ahead.