Cooling inflation in July amid sustained consumer spending

Wells Fargo Research Team Wells Fargo

Summary

Spending still outpaced income in July, setting up for a decent Q3, and inflation continued to cool. With the 3-month annualized rate of core PCE inflation back below the Fed's 2.0% target, the case for "higher-for-longer" is not a compelling one.

Argument for restrictive policy looks Weaker

Yesterday's GDP report already showed that consumer spending was stronger in the second quarter than first reported; today's personal income and spending report reveals July data and shows that the third quarter is off to a compelling start.

Today's report also offers affirmation that inflation is indeed on a cooling path with core PCE inflation at 2.6% (chart). For policymakers at the Federal Reserve, maintaining restrictive policy is becoming difficult to justify with the three-month annualized rate now back below target at 1.7%.

At the start of this month, financial markets were cast into a tailspin when July employment data came in much softer than expected. It is difficult to square that jobs market weakness with not only sustained consumer spending, but income gains that feel more like the sort you would see in a stronger labor market. Driven by a 0.3% increase in wages and salaries, overall compensation also rose 0.3%. Both measures are up 4.4% over the past 12-months. After accounting for inflation and taxes, real disposable personal income rose 0.1% in July and is up 1.1% over the past year. In plain English, paychecks are growing slightly faster than inflation and that is allowing consumers to spend—at least for now. A key concern is that if the jobs market gets worse amid a policy environment that remains too restrictive, income could slip. The wage gains are still encouraging for July, but we are skeptical pay will continue to rise at such a solid pace if there is further softening in jobs.

In the meantime, remarkably, income is still not keeping up with spending. In order to sustain the increased outlays, households have pared back saving to 2.9%. That is just the second time in 16 years that the savings rate has had a 2-handle.

Download The Full Economic Indicator

Author

Wells Fargo Research Team

Wells Fargo

AUD/USD breaks below 0.7000 ahead of inflation data

AUD/USD has accelerated its downward trend on Tuesday, breaching below the key 0.7000 yardstick ahead of the opening bell in Asia on Wednesday. Indeed, spot has retreated for the second day in a row despite the hawkish hike by the RBA early on Tuesday and in response to the continuation of the move higher in the Greenback. Looking ahead, all the attention will be on the release of Australia’s inflation data on Wednesday.

USD/JPY consolidates near 157.50 as a bullish USD counters intervention risks

USD/JPY struggles to capitalize on the overnight bounce from a one-week low, consolidating around 157.50 in the Asian session on Tuesday. Trump's concerns about the Japanese Yen's weakness fueled speculation about another US-Japan joint intervention. This, along with the hawkish BoJ, underpins the JPY and caps the currency pair. Meanwhile, rising Fed rate-hike bets and oil-driven inflation fears continue to push US bond yields to multi-year highs, keeping the US Dollar pinned near a two-month high and supporting the pair.

Gold trims gains; back toward $4,150

Gold now surrenders some of its initial advance and retests the $4,150 zone per troy ounce on Tuesday. Meanwhile, the move higher in the yellow metal comes despite the firmer US Dollar and rising US Treasury yields across the board, while escalating geopolitical tensions appear to limit the downside potential.

XRP advances within a robust technical structure

Ripple (XRP) shows signs of stabilizing after reclaiming support at $1.50 on Tuesday. A robust technical structure underpins the token’s short to medium-term bullish outlook. Still, XRP is not out of the woods yet, as profit-taking and buyer exhaustion could weigh on price action and extend the recent correction from September highs around $1.66.

RBA recap: Rate hikes are on the table as demand stays too strong

The Reserve Bank of Australia unanimously tightened monetary policy, warning that inflation remained too high and that several upside risks had begun to materialise. Governor Michele Bullock said the Board would raise rates again if necessary.

Silver is more volatile than Gold ahead of PCE and NFP. This chart shows the positioning gap

The market’s attention is focused on American data this week, but there’s something only those with a trained eye may be looking at: Gold and Silver positioning gap. Financial markets are moving on fears, mostly related to persistently high energy prices driven by the Middle East war. Sure, the US Dollar (USD) is strong, but at what cost?