LIVE MARKETS-PCE vs UMich: More spending/souring sentiment, steady prices/rising inflation expectations

Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

PCE VS UMICH: MORE SPENDING/SOURING SENTIMENT, STEADY INFLATION/RISING INFLATION EXPECTATIONS

Friday economic data delivered in-line inflation data but increasing inflation expectations. It also offered better-than-expected consumer spending but deteriorating consumer sentiment.

So what gives?

The most anxiously awaited economic release this week, Commerce Department's wide-ranging Personal Consumption Expenditures (PCE) report USPCE=ECI offered some minor surprises to the upside.

But the PCE price index, Powell & Co's pet inflation yardstick, landed right on the money.

As expected, prices rose by 0.3% last month, and by 2.7% year-over-year, hitting the consensus bull's eye. Both numbers were 10 basis points hotter than July.

Stripping away volatile food and energy prices, core PCE rose on monthly and annual bases by 0.3% and 2.9%, respectively. Both numbers also stuck the landing, nailing analyst expectations.

Taken together with the other three major inflation measures - wage growth, CPI and PPI - it can be said that price growth generally gathered some momentum in August, offering a reminder that the troublesome last mile down toward the Fed's average 2% inflation target is a difficult gap to bridge.

"Inflation remains sticky, but it's showing no signs of accelerating that would hinder the Fed from at least cutting one more time before year-end," Peter Cardillo, chief market economist at Spartan Capital Securities tells Reuters. "Today's inflation news says that will get one more rate cut. Two rate cuts, that’s probably a coin toss now.

Other aspects of the report offered some more upbeat news.

Personal income increased 0.4%, stronger than the 0.3% increase economists predicted and offering a repeat of July's reading.

Consumer spending, the tent pole of the U.S. economy, also surprised to the upside, rising by 0.6% over the prior month's 0.5% reading, coming in stronger than the 0.5% consensus.

“Inflation likely gets the headline in today’s report, but for those interested in a wholistic view of the economy, the income and spending numbers may be more important," writes Scott Helfstein, hed of investment strategy at Global X. "Income continued rising at a good clip as did spending. This likely sustains strong consumption and possibly leads to better than expected third quarter growth."

Digging deeper, expenditures on durable goods subsided, easing to 0.8% monthly increase from July's unsustainable 1.8% surge, while spending non-durables heated up, rising by 0.5% versus the previous month's nominal 0.1% gain. Outlays on services remained subdued, increasing by 0.2%.

Disposable income rose by a meager 0.1%, which helped drag the saving rate - or the unspent portion of disposable income - down to 4.6% from 4.8%. That's the lowest reading this year.

While the saving rate is often viewed as a barometer of consumer anxiety, the nominal growth of disposable income compared with the bigger than expected increase in spending suggests budgets are being squeezed by the rising cost of living.

Speaking of consumer anxiety, The University of Michigan's (UMich) second and final take on September consumer sentiment USUMSF=ECI was downwardly adjusted to 55.1 from its originally stated 55.4.

It's the lowest final UMich reading since the April/May numbers, which, at 52.2, were the bleakest UMich readings nearly three-year lows.

Survey participants' assessment of present conditions deteriorated by 1.3% from UMich's initial take and 2.1% from last month, while near-term expectations were revised nominally lower, landing 7.5% below the August print.

"Not only did macroeconomic expectations fall, particularly for labor markets and business conditions, but personal expectations did as well, with a softening outlook for their own incomes and personal finances," says Joanne Hsu, UMich's director of consumer surveys.

"Consumers continue to express frustration over the persistence of high prices, with 44% spontaneously mentioning that high prices are eroding their personal finances, the highest reading in a year."

Speaking of which, the closely scrutinized inflation expectations element was downwardly revised from UMich's preliminary initial September reading.

Respondents now expect price growth of 4.7% a year from now, cooler than the originally stated 4.8%, but 1.8 percentage points hotter than today's core PCE price index reading.

Longer-term, consumers expect annual inflation of 3.7% five years from now, 20 basis points higher than last month.

Are consumers' inflation expectations accurate predictors of hard inflation data?

They are not.

But it's the psychological effect that high inflation expectations have on consumer behavior that concerns folks like Federal Reserve Chair Jerome Powell, as it has the potential to result in a self-fulfilling prophecy. The data shows that concerns about the inflationary effects of tariffs are still very much on consumers' minds.

(Stephen Culp)

*****

EARLIER ON LIVE MARKETS:

BEARISH BETS BUILD: STOCKS SET FOR A BUMPY RIDE CLICK HERE

WALL STREET SET TO GAIN GROUND AS INFLATION DATA KEEPS FED RATE CUT BETS ALIVE CLICK HERE

RALLY IN BANKING STOCKS STILL HAS LEGS CLICK HERE

GERMAN OPPORTUNITY? CLICK HERE

EUROPEAN BOURSES SHRUG OFF TRUMP'S TARIFFS CLICK HERE

EUROPE BEFORE THE BELL: TRUMP DOES IT AGAIN CLICK HERE

STOCKS COP ONE-TWO PUNCH CLICK HERE