U.S. inflation cooled significantly creating optimism that a soft landing is possible

Today the Bureau of Economic Analysis (BEA) released its most current inflationary data vis-à-vis the PCE (Personal Consumption Expenditure Price Index). The report revealed that in June inflationary pressures continues to diminish while consumer spending continues to expand.

The PCE index rose by 0.2% in June compared to an increase of 0.3% in May. Core inflation rose 4.1% annually which is a dramatic decline from the annual increase in May which came in at 4.6%. Although inflation is far from the Federal Reserve’s target of 2% today’s numbers come in at a level that shows the slowest rise of inflation in over two years.

The optimism created from today’s PCE report moved U.S. equity markets moderately higher with an increase of 1.9% in the NASDAQ composite, the Standard & Poor’s 500 increased by 1%, and lastly the Dow Jones industrial average increased by 0.5%. Market participants used this optimistic report on inflation as an underlying motivating factor to bid U.S. equities higher across the board. The precious metals also benefited posting moderate gains in gold and silver.

The most active August contract of gold futures is up $12.60 currently fixed at $1958.30. The August contract will soon switch over to the next most active December contract, gained $12.80 and is currently fixed just below $2000 at $1998. September silver gained $0.09 or 0.38% and is currently fixed at $24.46. There were slight tailwinds created from dollar weakness today with the dollar currently 0.09% lower taking the index to 101.455.

Gains in both U.S. equities and precious metals concurrently indicate that market participants are once again gaining confidence and building positive bullish market sentiment for these asset classes across the board. Logically, one can derive the fact that this most likely is an indication that further increases in U.S. equities and precious metals are highly likely in the weeks ahead.

The Federal Reserve also monitors employment costs closely it was revealed today that a quarterly measure of employment cost rose in the second quarter at its lowest pace in two years according to a report by the Bureau of Labor Statistics. The fact that U.S. inflation is diminishing, and wages are cooling is the type of news welcome by the Federal Reserve.

In addition to inflation levels, the PCE report also looks at consumer spending which rose in June the greatest increase since January of this year. Collectively these reports indicate a solid pace of economic expansion in the second quarter. This means that certain metrics are revealing wage growth is finally outpacing inflation which of course increases the purchasing power of Americans. This is a fact that will not be overlooked by members of the Federal Reserve.

Bloomberg reported that Sal Guatieri, senior economist at BMO Capital Markets, said, “A data-dependent Fed will see mixed results in today’s reports. Inflation and labor compensation are moderating, but consumers (and the economy) appear to be picking up steam.”

Members of the Federal Reserve will look at different components of the multiple reports released today. However, one thing is clear it is impossible for any Federal Reserve member to not recognize the importance of the fact that wage growth is outpacing inflation alleviating one of the most troublesome problems that the Federal Reserve has been attempting to tackle. Juggling a hot labor market leads to high wage growth and its effect on inflation. In the case of today’s numbers because wage growth is outpacing inflation it can only be seen as a positive change in the complex fabric that makes up the economy in the United States.

Wishing you as always good trading,