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USD turned lower last week as inflation headed toward normal levels

US PCE Inflation Remains Steady in August

Posted Saturday, October 2, 2021 by
Skerdian Meta • 2 min read

USD turned lower last week as inflation headed toward normal levels

The US core PCE data for the month of August remain steady at 3.6%. That was the expected rate as well. Although inflation remains well above the 2% level, the expectations are that some of the gains are transitory and will come down over time. However, the risks still remain to the upside.

Fed’s Mester said today that she expects inflation to remain above 2% next year and the year after. Feds Harker today also talked of higher inflation saying that he’s penciling in a significant risk of higher inflation and that some business leaders are saying there could be years to resolve supply chains.

Personal Consumption Expenditure Inflation Report

PCE core MoM +0.3% vs +0.3% expected
Prior MoM +0.3%
Core PCE +3.6% vs +3.6% expected
Prior was 3.6% y/y
Headline PCE +4.3% vs +4.2% prior
Deflator MoM +0.4% vs +0.4% prior

Consumer spending and income for June:

Personal income -0.2% vs +0.3% expected. Prior month +1.1%
Personal spending +0.8% vs +0.6% expected. Prior month +0.3%
Real personal spending +0.4% vs -0.1% prior

These numbers are largely in line with the consensus but the income line was surprisingly soft. The good news (for the Fed) is that there’s no big surprise jump in inflation.

Maybe the most-notable data point looking forward is that at 9.4% the personal savings rate remains extraordinarily high. That’s down from 10.1% in July but shows there is still plenty of fuel in the tank for later.

In other fundamental news today, the ISM manufacturing index came in at a strong 61.1% versus 59.6% but construction spending was unchanged versus 0.3% estimate for the month of August. The Michigan consumer sentiment came in hundred 72.8 versus 71.0 expected. So overall not a bad day as far as economic data goes.

In the markets, there was some support premarket after news that Merck was looking to fast track a Covid drug that would lower hospitalizations by 50% for those infected. That finally sent Merck shares higher but also the stocks like airlines and Disney also surged on hopes for a more normal economy going forward. Will that get people back to work?

Next week we get the US jobs report on Friday with expectations for 490K increase in jobs. That is down from higher levels for the recovery, but would be up from the 235K surprise reading last month. Despite the weaker report last month, the Fed chair Powell said this week that employment gains were on track and that is not necessary to seek blockbuster job gains going forward.

US stocks today moved higher across the board with the Dow industrial average leading the way thanks to Merck (+8.4%), Disney (+4.1%) and American Express (+3.8%). A look at the final numbers in the stock market shows:

In the US debt market, yields came down by -5.8 basis points and is back below the 1.500% level at 1.4669%. For the week, the yield closed last Friday at 1.454%. With the decline today, the tenure is only up 1.5 basis points on the week. The high yield did extend to 1.56% on September 29 before starting its move back to the downside of the last few days.