This morning the market digested updates on inflation and the health of the US consumer with the Personal Consumption Expenditures (PCE) Price Index for April coming in lower than the previous month, but still running well above average at +6.3% year-over-year. The PCE Core Deflator, which excludes the volatile food and energy components of inflation, also dropped by 0.3% from last month to +4.9% year-over-year. The drop in the rate of year-over-year price increases is an indication that inflation might have reached its peak level. Personal spending proved resilient, up 0.9% month-over-month, with strong positive revisions to the previous month’s reading. The US savings rate fell to 4.4% for the month of April, the lowest level since 2008. The average consumer still has capacity to spend from accumulated savings, higher wages and credit lines, but there are signs that elevated gas, food and shelter costs are pressuring discretionary spending decisions. New home sales were down 16.6% month-over-month in April to an annualized rate of 591,000 as a combination of sky-high real estate prices and rising mortgage rates create affordability challenges for potential buyers.
Cross currents from the war in Ukraine, lockdowns in China, and geopolitical tensions continue to fuel market uncertainty about the future path of the economy. Bond yields dropped during the week as new issue supply of corporate bonds was light and investors moderated expectations for rate hikes by the Federal Reserve later in the year. Fed fund futures are currently pricing in a 0.50% rate hike at the June 15 Federal Open Market Committee (FOMC) meeting followed by another 0.50% increase on July 27. The Fed is also planning to commence the wind down process of its nearly $9 trillion balance sheet starting on June 1. Tightening monetary policy is expected to be a catalyst for additional market volatility and to weigh on US economic growth for the remainder of 2022.
Next Week:
Case-Shiller, Consumer Confidence, ISM Manufacturing, Fed Beige Book, Employment Report
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