U.S. PCE deflator expected to show little change and remain tame
Personal income and spending expected to show solid increases
Pending home sales expected to give back a little of its recent strength
MBA mortgage applications expected to remain generally strong
Weekly EIA report
U.S. PCE deflator expected to show little change and remain tame — The market is expecting today’s May PCE deflator, the Fed’s preferred inflation measure, to show little change. Specifically, the market is expecting the May PCE deflator to edge lower to +1.0% y/y from April’s +1.1% y/y and the May core PCE deflator to be unchanged from April’s +1.6% y/y.
Both of the measures are expected to remain well below the Fed’s inflation target of +2.0%, meaning that the Fed is under no pressure from the inflation outlook to raise interest rates. The lack of inflation pressure is good news for the Fed, which can’t raise interest rates at present in any case because of Brexit and the recent slump in U.S. payroll hiring. The federal funds futures market is currently reflecting a near-zero chance of a Fed rate hike this year.
Oil prices have risen in recent months, which has put some upward pressure on the headline inflation statistics. The U.S. inflation statistics are also seeing some upward pressure from higher import prices stemming from the dollar’s weakness seen since the beginning of the year. However, the core inflation statistics have recently shown little change due to weak global economic demand and continued deflationary global forces.
The CPI and PPI reports for May have already been reported. The CPI was little changed with the May CPI edging lower to +1.0% y/y from April’s +1.1% and the May core CPI edging higher to +2.2% y/y from April’s +2.1%. The May final-demand PPI fell to -0.1% y/y from unchanged in April and the May core PPI moved a bit higher to +1.2% y/y from +0.9%.
Personal income and spending expected to show solid increases — The market is expecting today’s May personal income and spending reports to show solid increases that support expectations for the U.S. consumer to continue to support the economy, assuming that job hiring isn’t about to show even more weakness than it already has. U.S. consumer confidence and spending remains generally strong so far but threats include (1) the UK Brexit vote that pushed the U.S. stock market lower and added uncertainty for the U.S. economy, (2) the recent downtrend in hiring, (3) the slow rise in gasoline prices, and (4) the toxic presidential campaign.
Specifically, the market is expecting today’s May personal income report to show an increase of +0.3%, adding to April’s +0.4% increase. Meanwhile, the market is expecting today’s May personal spending report to increase by +0.4%, adding to April’s sharp increase of +1.0%.
Pending home sales expected to give back a little of its recent strength — The market is expecting today’s May pending home sales report to show a decline of -1.1% m/m, giving back part of April’s strong report of +5.1%. On a year-on-year basis, the market is expecting today’s May pending home sales report to improve to +4.6% y/y from +2.9% in April.
Today’s expected -1.1% decline in May pending home sales would suggest some cooling off of the recent strength in home sales. The pending home sales report measures the change in home sales contracts and generally leads to existing home sales within one to two months, thus providing some leading information on the existing home sales series. U.S. existing home sales in May rose by +1.8% to post a new 9-1/3 year high of 5.53 million units.
MBA mortgage applications expected to remain generally strong — The markets will be watching today’s weekly MBA mortgage applications report for an update on mortgage activity. The MBA mortgage applications sub-index is currently in strong territory, indicating that there are a relatively large number of people out applying for mortgages to buy a home.
Meanwhile, the MBA refinancing sub-index is also strong, boosted by the recent drop in mortgage rates. Last week’s 30-year mortgage rate of 3.56% was only 2 bp above the previous week’s 3-year low of 3.54%. The further decline in Treasury yields seen since last Thursday’s Brexit vote will put additional downward pressure on mortgage rates, likely leading to a further increase in refinancing activity in coming weeks. Increased refinancing activity is good for the economy since the lower mortgage payments that result from a refinanced mortgage frees up disposable income for consumers.
Weekly EIA report — The market consensus for today’s weekly EIA report is for a -2.5 million bbl decline in U.S. crude oil inventories, a -300,000 bbl decline in gasoline inventories, a +625,000 increase in distillate inventories, and a +0.5 point increase in the refinery utilization rate to 91.8%. The API reported yesterday that U.S. crude oil inventories last week fell by -3.86 million bbls, Cushing inventories fell by -1.21 million bbls, gasoline inventories fell by -416,000 bbls, and distillate inventories fell by -832,000 bbls. The EIA last week reported that U.S. oil production in the week ended June 17 fell by -0.4% to a new 1-3/4 year low of 8.677 million bpd. The latest level is down by -933,000 bpd (-9.7%) from the 44-year high of 9.610 million bpd posted in June 2015.
