US personal income expenditure preview

Personal consumption, income data along with PCE price index would be released from the U.S. at 13:30 GMT for the month of December.  data delayed due to the government shutdown.

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 the 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 four times in 2018 and forecasted two more hikes in 2019. But the actual numbers of hikes would be a function of actual inflation.

Past trends –                      

• The 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 November 2018, PCE inflation was at 1.8 percent y/y.

• According to last data on November, Core PCE index was up 1.9 percent y/y.
   
• According to Fed communications, income has been growing at a solid rate. However, in November, growth was only 0.1 percent.
   
• Compared to income, spending has remained subdued over the years. Only in 2018, it has shown signs of a rebound. In November, spending grew by 0.4 percent.

Expectation today –

• Personal income is expected to grow by 0.4 percent in December, while spending is expected at 0.3 percent. PCE index growth is expected at 1.7 percent y/y.

Market impact –

With market not agreeing to 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 income and spending numbers likely to boost the S&P 500 and the dollar, which are currently trading at 2803 and 96.2respectively.