Daily Market Color

Treasurys Rally as Consumer Spending Recovers, Inflationary Pressures Decline

US economic data releases today were highlighted by a report from the Commerce Department which outlined consumer income and outlays during the month of April.  Consumer spending rose 0.4% last month, in-line with expectations, representing the largest increase since December 2016.  Personal income similarly matched economists’ forecasts of a 0.4% uptick, boosted by a 0.7% gain in the wages and salaries component.  Additionally, the personal savings rate held steady at 5.3% for the third consecutive month.  Inflation data contained in the report displayed a more tempered economic outlook for the start of the second quarter.  The core PCE index, the Fed’s preferred measure of inflation, rose 0.2% MoM and 1.5% compared to a year earlier.  The YoY figure is the lowest it has been since December 2015, as declining price pressures in the first quarter of 2017 weighed on the index.  Commenting on the inflation data in a speech earlier today, Federal Reserve Governor Lael Brainard characterized the current level of inflation as a “considerable shortfall” compared to the central bank’s goal.  Brainard further explained that “if the tension between the progress on employment and the lack of progress on inflation persists, it may lead me to reassess” the path of future Fed hikes, which currently points towards two more quarter-point increases for the remainder of 2017, with fed fund futures implying a greater than 85% probability of a June hike.  Other economic data reported today included the S&P CoreLogic Case-Shiller Indices, which displayed home prices across the nation rising at their fastest annual rate in nearly 3 years at 5.8% for March, and the Conference Board’s Consumer Confidence Index, which edged lower to 117.9 from 119.4, representing a marginal decrease, albeit still robust level, in consumer expectations of the economy during May.

All three major US stock indices declined 0.10%-0.25% on the day, as gains in technology shares were more than offset by losses in energy and financial stocks.  US Treasurys rose throughout the session, with yields/swaps rates down 2-6 bps across the curve, bringing the yield on the 10-year note to 2.20%.  The US dollar held relatively flat for the day after initially gaining with the consumer spending data, before reversing course later in the session.  Crude oil futures are currently 0.6%-1.1% lower to begin the week, with a barrel of WTI crude trading near $49.50 and Brent crude close to $51.70.  

Abroad, ECB President Mario Draghi was interpreted to have used dovish rhetoric to describe future monetary policy in the euro area during testimony at the European Parliament in Brussels on Monday.  Draghi acknowledged optimism in the region’s economy as of late with political risks fading and employment data improving, but warned of persistent, below-target inflationary trends.  Contrary to the recent commentary of several top politicians in the area who have been voicing the desire for a tightening of policy, Draghi stated “It’s still very, very early to make us think we are going to change the monetary policy stance.”  In support of the ECB President’s stance, this morning Germany’s inflation rate for May was reported at +1.4%, a significant drop-off from April’s +2.0%.  Inflation figures for the entire euro-area are due to be released tomorrow, with expectations calling for a +1.5% monthly rate.

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