Via Millan Mulraine at TDSecurities:
US: Inflation Momentum Weakening, Consumption Stalls
· The ECI rose at an on-consensus 0.6% q/q rate, with the annual pace of employment cost inflation decelerating to 1.9% y/y from 2.0% y/y..
· The core PCE inflation rate was also on the weak side, rising at a meager 0.1% m/m pace. The annual pace of core PCE inflation declined to 1.6% y/y from 1.7% y/y.
· On the consumption front, the news was quite disappointing as real personal spending ended the quarter on very flat footing, providing a very weak hand-off to Q2.
· Overall, the tone of these reports was quite weak, playing into the current narrative of weakening growth and subdued inflationary momentum. This will continue to argue for caution at the Fed.
The US inflation picture appears a bit more benign, as the ECI rose at an on-consensus 0.6% m/m pace (up 0.64% m/m) in Q1, following a similar pace the month before. On a year ago basis, however, the annual pace of employment cost inflation slowed to 1.9% y/y from 2.0% y/y, marking the slowest pace of advance in this indicator since Q1-2014. Wages edged 0.7% m/m higher, though the annual pace of wage growth remained unchanged at 2.1% y/y. Benefits advanced 0.5% m/m, down from 1.8% y/y to 1.7% y/y. The core PCE inflation performance was also weak, rising at a very subdued 0.1% m/m pace (up 0.052% m/m at three decimal places), resulting in the annual pace of core PCE inflation also decelerating, falling to 1.6% y/y from 1.7% y/y.
Personal spending activity was also disappointing. In particular, real personal consumption activity ended the quarter on a flat footing, providing a very weak hand-off to the next quarter. As a result, our early tracking for Q2 is now closer to the lower end of the 1.5% to 2.0% range, suggesting a very weak rebound for growth from the disappointing +0.5% q/q performance in Q1. To be sure, we continue to have a very favorable outlook for consumption spending activity, given the constructive backdrop (buoyant labor market activity, high confidence and a formidable savings war chest). Nevertheless, unless we have a very strong rebound in spending momentum in April, the risks to our current GDP tracking will drift to the downside.
Overall, the tone of these reports was quite weak, playing into the current narrative of weakening growth and the subdued inflationary momentum. This will continue to argue for caution at the Fed, and our current base-case is for the Fed to remain on the sidelines until the September FOMC meeting – unless growth rebounds strongly in Q2, which could potentially bring the July meeting into play.