Summary:

• June Core PCE +1.5% vs +1.5% prior (revised higher from +1.4%) 
• Personal spending figures robust but income equivalent unexpectedly drops
• US dollar remains languishing towards the bottom of its recent range; ISM at 3pm BST

We earlier noted that the US dollar had fallen lower once more overnight to trade at fresh 2017 lows ahead of the Wall Street open after more shenanigans from the White House. The latest batch of data released from the US has a few positives but so far this hasn’t been enough to blow off the cloud of political uncertainty that currently sits over the US dollar. 

The Fed have often quoted the PCE index as their preferred inflation measure and whilst the headline reading continued its decline their was a pick-up in the core reading. In year on year terms the Core PCE price index for June came in at +1.5% which was inline with the newly revised higher prior reading (revised up from +1.4%.) From the chart below you can see there had been a marked decline in this inflation indicator (shown by the white line and the LHS axis) but the drop appears to have levelled off. The decline here since the start of the year had been some as a sign that the Fed may hold off on further rate hikes and whilst today’s reading doesn’t mark much of an increase at least the declines have stopped for now.  

 

 The core pce price index has halted its recent declines and held steady at +1.5% yoy after the prior reading was revised higher 

If there is a case to be made for the PCE price index data to be seen as mildly positive the same cannot be said for the personal income and personal consumption figures that were released at the same time. Both of these have continued their recent declines with the drop in consumption of particular concern (yellow line on chart below). On the bottom half of the chart you can see that the spread between these, which in effect measures how much more US citizens are consuming than what they are spending has been declining since peaking in December (this month has positive seasonality due to the Christmas holidays).

Having said that, declines here aren’t necessarily to big a warning sign as it is unsustainable for consumers to continue to outspend what they earn for a prolonged period. Looking back to 2014 and 2015 the entire year in both these cases saw consumers saving on a net basis. There was a marked rise in consumption in the second half of last year but that has now fallen back, probably due to a fairly steady decline in personal incomes. 

 The surge higher in consumption seen in the second half of last year has subsided, probably due to a gradual but sustained decline in personal incomes. 

In terms of market reaction the moves seen in the US dollar we fairly muted and the currency sits almost bang in the middle of its recent range. ISM manufacturing data at 3pm is the next data point to watch for the buck but before that it may be interesting to see how the US open impacts the market. 

 The US dollar is trading little changed on the day as market participants look to the US open and the ISM release to see if the currency can mount a sustained recovery