May Core PCE at 4.7%, S&P 500 Bruised Despite Better-than-Expected Inflation Data

US PCE REPORT KEY DETAILS:

• May U.S. consumer spending advances 0.2% versus 0.4% expected
• Core PCE, the Fed’s favorite inflation gauge, rises 0.3% month-on-month and 4.7% from a year earlier, one tenth of a percent below expectations
• S&P 500 trims some losses after inflation data comes better-than-expected, but remains in negative territory amid sour sentiment

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The U.S. Bureau of Economic Analysis released its latest report on personal consumption expenditures this morning. According to the statistics agency, May personal spending rose 0.2% month-over-month versus 0.4% expected, a sign that the American consumer is losing strength as broadening price pressures in the economy continue to erode purchasing power and batter families’ finances, despite the solid labor market and enhanced savings accumulated during the pandemic. Softening consumer spending in the latter part of the second quarter may increase fears of a recession, considering that household consumption is the main engine of U.S. economic activity.

Elsewhere, the PCE Price Index, which measures costs that people living in the U.S. pay for a variety of different items, rose 0.6% month-over-month and 6.3% year-over-year, slightly below forecasts. Meanwhile, core PCE deflator, the Federal Reserve’s preferred inflation gauge that excludes food and energy and is used to make monetary policy decisions, advanced 0.3% on a seasonally adjusted basis, bringing the annual reading to 4.7% from 4.9% in April, one tenth of a percent below consensus expectations.

MAY PCE DATA

Source: DailyFX Economic Calendar

Better-than-expected inflation data confirmed speculation that price pressures are peaking, but did not improve market morale significantly, as the rapid slowdown in personal spending will create headwinds for the consumer-driven economy. While the directional PCE improvement is welcome, it is unlikely to prompt the Fed to deviate from its plans to front-load interest rate hikes at upcoming meetings, at least for now, with the central bank steadfast in its commitment to return inflation to 2%.

Immediately after the personal consumption expenditures report was released, S&P 500 futures contracts trimmed some pre-market losses, but remained stuck in negative territory, undermined by fears of hard landing amid tightening financial conditions.

Risk assets are likely to stay biased to the downside in the near-term until the macroeconomic environment improves meaningfully and there are stronger signals that the Fed will slow its normalization cycle.

S&P 500 FUTURES (5 MINUTE CHART)

S&P 500 Chart Prepared Using TradingView

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—Written by Diego Colman, Market Strategist for DailyFX