US personal income and outlays report in the limelight today - Rabobank

Philip Marey, Senior US Strategist at Rabobank, suggests that today’s main data release is the US personal income and outlays report for June.

Key Quotes

“While we already learnt from last Friday’s GDP release that personal consumer spending was strong in Q2, today’s report may provide more details about momentum in June, but also about personal income and saving.

What’s more, the report also provides the PCE deflator. While the BEA uses this figure to translate nominal spending into real spending, the Fed thinks it is the best measure of US consumer price inflation. Therefore the Fed’s 2% inflation target is formulated in terms of the PCE deflator, not the CPI. While the PCE deflator has moved sideways around 1.0% this year, reaching 0.9% in May, the core PCE deflator – which excludes the volatile food and energy prices – has remained substantially higher, at 1.6% in May. This is in line with the view that the low inflation in the US has been largely caused by low oil prices. Consequently, it suggests that unless oil prices take another slide, inflation will rebound going forward.

Note that the FOMC wants to see actual progress of inflation toward the 2% target, not just projections, before the next rate hike. The doves in the Committee have been able to get this explicitly included in the post-meeting statement and last week was no exception. While most attention goes to GDP (last Friday) and nonfarm payrolls (this Friday), today’s report provides the information needed to assess the third condition for the next rate hike.

Talking about rate hikes, Dallas Fed President Robert Kaplan will speak on economic conditions and the implications for monetary policy in Beijing today, at 12:15 CET. (Note that he does not vote until next year.) In an earlier TV interview he said that a rate hike is still ‘very much on the table’ in September, but we don’t think a hike next month is very realistic after last Friday’s GDP report. With the following meeting taking place less than a week before the elections, we do not consider November a plausible option either. That leaves the December meeting as the first feasible option to hike rates. However, this will require stronger GDP growth than we have seen so far this year, sufficient employment growth to a least absorb the inflow to the labor market, and rising inflation.”