Fed’s Preferred Inflation Gauge Was Slightly Elevated in May

Rates rise slightly following inflation print. Core personal consumption expenditures (PCE) was slightly higher than expected in May, creating some concern about the impact of tariffs on inflation. Yields rose 1-4 bps across the curve, the first daily climb of the week. The 2-year yield closed just under 3.75% while the 10-year yield closed near 4.28%, cementing 16 bp and 10 bp declines on the week, respectively. Meanwhile, positive US trade negotiation developments contributed to an equity rally. The S&P 500 (6,173) and NASDAQ (20,273) climbed 0.52% today to extend their all-time highs.

Weak consumer spending overshadows PCE. Today’s PCE report was relatively unsurprising, showing inflation was largely in-line with or just slightly above estimates across all readings in May. Headline inflation was unchanged from April on a monthly and yearly basis, as expected. Core monthly inflation was 0.2% vs. expectations of 0.1%, and yearly inflation was 2.7% vs. expectations of a 2.6% print. Meanwhile, declines in both personal income and spending during May were interpreted as possible signs of weakening economic conditions. Personal income declined 0.4% in May, vs. expectations of a 0.3% advance, and personal spending fell by 0.1% vs. expectations of a 0.1% increase. The decline in spending coincides with weaker consumer sentiment and is troublesome given consumption is a key driver of U.S. economic growth. Spending fell across various discretionary categories, such as transportation services, dining and accommodation, as well as other categories such as financial services, other services and auto purchases.

President Trump says more trade deals are imminent. President Trump said today that the US has made a trade deal with “probably four or five different countries,” including China and the UK. Meanwhile, optimism is growing that the US can make deals with India and the EU. Secretary Lutnick said yesterday that “Europe has done an excellent job, they’re working hard… I’m optimistic — I think we can get a deal now” while President Trump said a “very big deal” with India is “coming up.” On the other hand, progress with Canada has faded, and President Trump announced today that trade talks are over in retaliation for Canada’s digital services taxes on US tech companies.