US Data Paints Downbeat Outlook For Near-Term Growth

It’s been an exceedingly slow start to the week with most of Europe out of the office for an extended holiday weekend, but trade is starting to pick up modestly heading into the US session.

Traders got their first taste of what should be an active week of economic data with the release of the February’s US Core Personal Consumption Expenditures (PCE) figure, as well as Personal Income and Spending data for that month. Core PCE is the Fed’s preferred inflation number, and with recent improvements in wages and the more widely-watched Consumer Price Index (CPI) indicator, hopes were high that Core PCE would confirm growing price pressures in the US economy.

Unfortunately for Fed hawks though, the figure came out slightly below expectations, showing that prices rose only 0.1% m/m (1.7%) year-over-year. The stagnation in Core PCE validates the Fed’s decision to shift to a less hawkish posture in its recent meeting and makes it marginally less likely that the US central bank will raise interest rates in its June meeting. According to the CME’s FedWatch tool, fed funds futures traders are currently pricing in about a 42% chance of a rate hike come June, and over the coming weeks, the dollar is likely to trade in sync with these expectations.

The other noteworthy economic release out of the world’s largest economy was February’s Personal Income and Spending data, which was slightly more optimistic. Personal Income rose 0.2% over the month, better than the 0.1% rate economists had anticipated. That said, Personal Spending came in a tick below expectations at 0.1% m/m vs. 0.2% eyed; taken in tandem, these figures suggest that US consumers both earned and saved more than expected, which historically supports the longer-run sustainability of the economy at the expense of short-term growth.

Now, traders will turn their attention toward the Pending Home Sales report at 10:00 ET (14:00 GMT), with Consumer Confidence data and a speech by Fed Chairwoman Yellen on tap for tomorrow. Later in the week, the US labor market is likely to steal the show, culminating in Friday’s release of the March Non-Farm payrolls figures (stay tuned for our full NFP preview report on Thursday).

Market Reaction

The market’s reaction to today’s economic data has been predictably subdued, though the US dollar is edging lower on the near-term data disappointments. On the whole, market sentiment appears cautiously optimistic heading into the US session, with US equities pointing toward a modestly higher open and oil nudging 1% higher. Readers should expect volatility and market activity to ramp up gradually as we head through the week.