Data Does Not Change The Uncertainty Factor

Yesterday, after the long holiday weekend, we might have expected some hint of certainty but we received instead contradictory data, which, in all objectivity, however, was quite positive for the U.S. economy. Some of it reinforced the idea that the Fed would raise rates in the June meeting. Some of the data old the hawks to step down and wait one more FOMC meeting. 

U.S. consumer spending recorded its biggest increase in more than six years in April and inflation rose steadily, crucial signs of acceleration in economic growth. We will have to see how much of that “inflation” is due to the recovery of crude oil prices, which would not indicate true inflation but a reversion to a mean. 

According to the S&P/Case-Shiller Home Price index, all home prices rose 5.4% in March.

On the down side, the Chicago Purchasing Managers Index, or PMI, for May came in at 49.3, below the expected reading of 50.5. Consumer confidence for May also disappointed, coming in at 92.6. Economists polled by Reuters expected a reading of 96.

Further, today (Wednesday) GM auto sales plunged – and that is putting it mildly – by 18%. Ford’s sales dipped a hefty 5.9%. This would normally be startling but, the declines are off record-breaking highs so high that the car companies are on track to book another record-breaking year. 

The U.S. dollar was trending lower today, which helped push gold up in that manner, but regular trading pushed the yellow precious metal down so much that it fell into the loss column. 

Although there is plenty of OPEC-meeting scuttlebutt telling us that there is going to be deep discussion of curtailing output, apparently the crude market today is having none of the rumors. West Texas Intermediate is down half a percent and Brent North Sea is off a shade less. 

Asian and European markets all ended in the negative, while as of midday, U.S. equities were also slightly in red territory. 

To return briefly to inflation, let’s acknowledge it was the PCE reading that jumped as opposed to the CPI. The PCE (personal consumption expenditure price index) jumped from an adjusted 0.0% to 0.6%. That 0.6% if it continued would yield a 7.2% annual rate. This measure is called “chained” because it is more accurately based on actual prices, and then is adjusted and massaged to show inflation over a longer period of time. 

The PCE “current" (which adjusts for inflation over the years) jumped from 0.0% to 1.0%. That 1.0% applied across twelve months is 12%. On an annualized basis, if these trends were to continue, consumers will have to pay 12% more for their consumption than they did last year. We do not expect those numbers to hold. 

Now, PCE isn't ranked as high as other indicators, but the reading is a confirmation of the recent regular inflation gauge topline number, which jumped from 0.1% to 0.4%, or an annual rate of 4.8%. 

There is a shift and inflation, more than any other single factor, makes the Fed very jumpy when it comes to interest rates. 
 

Wishing you as always, good trading,