- Fed’s preferred inflation measure is expected to ease a bit in March and give the Fed some additional breathing room
- Personal income and spending expected to be tepid
- Final-April U.S. consumer sentiment expected to be revised a bit higher
- April Chicago PMI expected to drop back after March’s surge
- Employment cost index expected to be little changed
Fed’s preferred inflation measure is expected to ease a bit in March and give the Fed some additional breathing room — The market is expecting today’s March PCE deflator, the Fed’s preferred inflation measure, to ease to +0.8% y/y from +1.0% in February. Meanwhile, the market is expecting the core PCE deflator to ease to +1.5% y/y from +1.7% in February.
The headline PCE deflator is being buffeted by oil prices, which plunged early in the year and have since been on the rise. However, the core PCE deflator is of much more importance since it illustrates that inflation pressures outside the volatile food and energy categories have been on the rise. The core PCE deflator rose from a 5-year low of +1.3% y/y seen through most of 2015 to +1.7% in Jan-Feb 2016. However, the market is now expecting the core PCE deflator to drop back to +1.5% as previous pressures were at least partially transitory.
The recent rise in the core PCE deflator has certainly not been enough to cause any panic at the Fed since the Jan-Feb level of +1.7% y/y is still below the Fed’s inflation target of +2.0%. In addition, the Fed has already said that it is not opposed to a temporary overshoot of its inflation target. However, if inflation is moving back down again, then the Fed has an additional reason to delay its next rate hike until it can be sure that inflation is destined to move up to its +2.0% target over the medium term.
Personal income and spending expected to be tepid — The market is expecting today’s March personal income and spending reports to be tepid at +0.3% and +0.2%, respectively. However, that would at least be a bit stronger than Feb’s report of +0.2% and +0.1%, respectively. Recent data has already shown that consumers climbed into a shell in Q1 and were spending at weak levels. The Commerce Dept reported yesterday that Q1 personal consumption eased to +1.9% from +2.4% in Q4, the worst showing in a year. The markets will be watching to see if personal spending can start to improve going into spring or whether the recent spate of soft spending will continue.
Final-April U.S. consumer sentiment expected to be revised a bit higher — The market is expecting today’s final-April University of Michigan U.S. consumer sentiment index to show a +0.3 point increase to 90.0 from the preliminary-April figure of 89.7, which would leave the index down by -1.0 points from March rather than the preliminary-April decline of -1.3 points. The Conference Board recently reported that its consumer confidence index in March fell by -1.9 points to 94.2, which did not bode well for today’s University of Michigan report.
U.S. consumer sentiment so far this year has been undercut by the financial market turmoil at the beginning of the year, the dysfunctional presidential campaign, weak GDP data, and the rise in gasoline prices from the February lows. However, the Q1 dip in consumer sentiment was mild and the market is hoping for an improvement in consumer sentiment as spring arrives. Supportive factors for consumer sentiment at present include continued strong U.S. labor market data, rising wages, rising home prices, the recovery in the stock market from the early-year losses, and the fact that gasoline prices remains at historically low levels even after the recent 40-cent rise.
April Chicago PMI expected to drop back after March’s surge — The market is expecting today’s April Chicago PMI to show a -0.6 point decline to 53.0, giving back part of March’s +6.0 point surge to 53.6. The Chicago PMI has recently been very volatile with an average absolute monthly change of 7.9 points over the last six months. The index has been bouncing back and forth across the boom-bust level of 50.0, thus failing to give a consistent reading on the Chicago-area manufacturing sector. Chicago-area manufacturing executives are clearly very uncertain about the prospects for their businesses.
In any case, the markets are mainly looking ahead to Monday’s April ISM manufacturing index, which is expected to show a -0.3 point decline to 51.5 after March’s +2.3 point increase to 51.8. The ISM manufacturing index took a sharp hit last year due to the strong dollar, weak overseas economic growth, and the petroleum and mining sector recessions. However, the ISM index has now risen for the last three reporting months by a total of +3.8 points to climb back into expansion territory above 50.0 and posted a new 8-month high of 51.8 in March.
Employment cost index expected to be little changed — The market is expecting today’s Q1 employment cost index to show an increase of +0.6% q/q, unchanged from Q4’s increase of +0.6%. The ECI in Q4 showed a year-on-year increase of +2.0% y/y, which was near the midpoint of the index’s 5-year range of +1.5-2.6%. The ECI is the broadest measure of employee costs. The recent behavior of the ECI suggests that businesses are not seeing any major upswing in employee costs. That is good news for the U.S. corporate world, which is in the midst of an earnings recession that is expected to last at least through Q2.
