Tepid US Inflation and Consumer Spending Data Ahead of Next Week’s Payrolls Report

Both US stocks and Treasuries are currently trading to the downside as investors assess a number of economic releases ahead of next week’s nonfarm payrolls report.  The majority of today’s US data underwhelmed and supports the Fed’s cautious approach with regards to raising rates to date.  The quarterly Employment Cost Index rose 0.6% in the first quarter, matching analysts’ expectations after similar increases in the previous two quarters.  The YoY pace slowed to 1.9%, the slowest four-quarter growth rate in two years, but some of the apparent weakness can be attributed to the strong Q1 2015 base of comparison.  The ECI, a broad measure of workers’ wages and benefits, is closely monitored by the Fed as an important gauge of labor cost inflation.  One would expect wage inflation to accelerate given the high job creation / low unemployment rate trends, but clearly labor market slack in certain sectors still remain.  Separate data released regarding the US consumer were mixed, but net/net disappointing.  Incomes rose at a robust 0.4% pace last month, but spending increased less than forecast as Americans opted to boost savings.  Consumer spending accounts for 70% of US GDP, so a deceleration of household expenditures would certainly impact future growth and output. 

Despite the weakness in today’s data, Dallas Fed President Kaplan said he may support a June or July rate rise, if economic data improves as he expects it to in the second quarter.  Kaplan believes financial markets currently underestimate the Fed’s willingness to follow up the December liftoff with a subsequent near term hike.  Kaplan was the first US central banker to comment following this week’s Fed decision.  It’s also worth noting that Kaplan believes even once interest rates normalize, the peak will be lower than we’ve seen historically.   
 
All three major US stock indexes are down just below 1%, while Treasury yields and swap rates are flat to up 2 bps across the curve.