Friday data bids adieu to near-term rate cut hopes

FRIDAY DATA BIDS ADIEU TO NEAR-TERM RATE CUT HOPES

Economic data released on Friday was essentially as expected, putting the nail in the coffin of hopes that the Federal Reserve will cut rates in the near future.

The Commerce Department's broad-ranging Personal Consumption Expenditures (PCE) data series for March (USPCE=ECI) arrived essentially as expected, packing a few extra degrees of heat.

The most hotly anticipated element was the price index, of course, which is Powell & Co's pet inflation yardstick and essentially the last word on how prices behaved in March.

On a monthly basis, headline and core (which excludes food and energy items) both nailed consensus by rising 0.3%.

Year-on-year, headline and core inflation both landed 10 basis points north of analyst expectations, at 2.7% and 2.8%, respectively.

The report is of a piece with previous inflation readings, including wage growth, CPI and PPI, which suggested that while inflation remains on a cooling trend, there will be rocks in the road as it meanders down toward the Fed's 2% annual target.

As for the Fed, they have sworn to be patient and data dependent. The likelihood of a 25 bp rate cut happening as soon as July have dwindled to 30.4% from 49.1%, according to CME's FedWatch tool.

"Given the elevated levels of inflation – and this is the new normal for 2024 – the market is going to need to get over hopes for Fed rate cuts," writes Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. "Yes, they may cut once (or not at all), but there is no possibility the Fed is going to cut rates 3 or more times, unless we go into recession."

Elsewhere in the report, consumer spending was more robust than anticipated, repeating February's 0.8% print, while personal income increased by 0.5%, in line with expectations.

"Incomes and consumer spending rose solidly in March, which should provide a little reassurance that the slowdown in first quarter GDP reported yesterday is not a sign of a stagflationary economy," says Bill Adams, chief economist at Comerica Bank.

Taken together, the saving rate - which indicates the unspent share of disposable income - sank to 3.2%, its lowest level since October 2022.

Finally we turn to the University of Michigan (UMich) for its final take on April consumer sentiment (USUMSF=ECI).

The top line number was revised 0.7 point lower to 77.2, due mostly to a 1-point deterioration in near-term expectations.

"Overall, consumers continue to express uncertainty about the future trajectory of the economy pending the outcomes of the upcoming election," says Joanne Hsu, UMich's director of Consumer Surveys. "But at this time there is no evidence that global geopolitical factors are on the forefront of consumers' minds."

This graphic shows monthly change in sentiment against monthly change in consumer spending, as expressed in the PCE report, showing what consumers say and do are often at odds:

Inflation expectations heated up in the near-term, with one-year expectations rising to 3.2% while five-year expectations held firm at an even 3%.

Both are hotter than today's core PCE reading.

(Stephen Culp)

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