US personal consumption expenditure preview

Personal consumption, income data along with PCE price index would be released from US at 12:30 GMT.

Why it matters?

• Personal consumption and income data provide information on consumer sentiment. Consumers tend to spend more, should they perceive upcoming time to be favorable.
   
• Increase in income also improves sentiment and purchasing power of consumers. Over the last two years or so, the Federal Reserve has repeatedly said that the income growth has been robust.
   
• PCE price index or PCE deflator is Fed’s preferred measure of inflation indicator. So this gauge is of extreme importance as FED will be closely monitoring inflation for subsequent hikes. Fed has indicated that it is likely to hike rates thrice in 2017 of 25 basis points each but the actual numbers of hikes would be a function of actual inflation.
   

Past trends –                      

• PCE price index, largely due to oil price started falling from 1.8 percent y/y in mid-2014 to as low as 0.1 percent y/y in June 2015. It has remained in the low area since. It has somewhat recovered since November 2015. PCE inflation, last month came at 2.1 percent y/y.

• Core PCE price index also slowed down as lower energy prices might be feeding into prices and spending remains subdued. Last month, it grew by 1.6 percent.
   
• According to Fed communications, income has been growing at a solid rate. Last month, it grew by 0.2 percent.
   
• Compared to income, spending has remained subdued. Growth was zero last month.

Expectation today –

• Personal income is expected to grow by 0.4 percent and spending by 0.1 percent.

Market impact –

With some policymakers posing doubts on the forecasted path of rate hikes, inflation is going to be the single most crucial factor in determining actual rate hikes. A better than expected numbers likely to boost S&P 500 and the dollar, which are currently trading at 2409 and 97.34 respectively.