US personal consumption expenditure preview

Personal consumption, income data along with PCE price index would be released from the US at 12:30 GMT for the month of July.

Why it matters?

• Personal consumption and income data provide information on consumer sentiment. Consumers tend to spend more, should they perceive upcoming time to be favorable.
   
• Increase in income also improves sentiment and purchasing power of consumers. Over the last two years or so, the Federal Reserve has repeatedly said that the income growth has been robust.
   
• PCE price index or PCE deflator is Fed’s preferred measure of inflation indicator. So this gauge is of extreme importance as FED will be closely monitoring inflation for subsequent hikes. Fed has increased interest rates by 25 basis points twice this year and indicated that it is likely to hike once more in 2017 but the actual numbers of hikes would be a function of actual inflation.
   

Past trends –                      

• PCE price index, largely due to oil price, started falling from 1.8 percent y/y in mid-2014 to as low as 0.1 percent y/y in June 2015. It started recovering since November 2015. After rising steadily through 2016, PCE inflation has once again come under pressure this year. PCE inflation declined from 2.1 percent in February to 1.5 percent as of last month.

• Core PCE price index also slowed down as lower energy prices might be feeding into prices and spending remains subdued. Last month, it grew by 1.4 percent.
   
• According to Fed communications, income has been growing at a solid rate. However, last month it failed to grow at all.
   
• Compared to income, spending has remained subdued. Growth was 0.1 percent last month.

Expectation today –

• Personal income is expected to grow by 0.3 percent and spending by 0.4 percent. PCE index growth is expected to decline to 1.4 percent y/y.

Market impact –

With some policymakers posing doubts on the forecasted path of rate hikes, inflation is going to be the single most crucial factor in determining actual rate hikes. A better than expected numbers likely to boost S&P 500 and the dollar, which are currently trading at 2461 and 93.2 respectively.