US personal income expenditure preview

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

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 the Federal Reserve members will be closely monitoring inflation for subsequent hikes. Fed has increased interest rates by 25 basis points thrice in 2017 and forecasted four more hikes in 2018 but the actual numbers of hikes would be a function of actual inflation. It has already hiked twice in 2018; once in the month of March and the follow-up one in June.

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 in 2017. PCE inflation declined from 2.1 percent in February to 1.6 percent as of September 2017. It has been growing since. In April 2018, PCE inflation was at 2 percent y/y.

• Core PCE price index slowed down as lower energy prices might still be feeding into prices and spending remains subdued. Last month, it grew by 1.8 percent y/y.
   
• According to Fed communications, income has been growing at a solid rate. Last month it grew by 0.3 percent.
   
• Compared to income, spending has remained subdued over the years. Growth was 0.2 percent last month.

Expectation today –

• Personal income is expected to grow by 0.4 percent in May, while spending is expected at 0.2 percent. PCE index growth is expected at 2.2 percent y/y.

Market impact –

With market 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 2731 and 94.76 respectively.