Real personal consumption expenditures rose +0.3% in May even as the y/y rate crept down from +3.0% to +2.7%. Over the past three months however PCE has gained +3.0% annualized, boding reasonably well for Q2. Real disposable income gained only +0.1% to a +3.2% y/y rate. No inflation was visible in the report as the Fed’s favorite measure, the PCE core rate remained at +1.6% y/y; it has ranged from +1.6% to +1.7% for five straight months.
Consumer confidence rose a sharp 5.6 points in June from 92.4 to 98.0. While evaluations of both the present and future rose, the divergence between the two remains very wide, near levels last seen in the recession, suggesting possible concern over the presidential election.
Corporate profits gained +1.8% in Q1, but it was only the first gain in three quarters and only the second gain in the last six quarters. On a real basis, profits are still shrinking -5.4% y/y. At the same time real investment is growing only +0.4%. Negative growth in profits and investment at the same time are an ominous sign for an economy, and although that is not the case currently, it is very close.
The Brexit vote shocked global financial markets, and in the US the S&P 500 lost 5.3% in two days. However the rapid sell-off appears to be a knee jerk reaction, and the market has now recovered over 75% of those losses. The bond market is still showing caution however. The day before the Brexit vote the yield on the 10 year US Treasury was 1.74%, but fell as low as 1.46% over the following two days, and has only crept back up a few basis points since then. As a result, over the same period the yield spread between the 10 year and the 3 month Treasury securities also shrank from 1.43% to 1.19% and has only recovered a few basis points since then.
As far as the real US economy goes, Brexit is likely to have almost no effect. Our colleagues in Paris estimate that over the period 2017-2019, cumulatively, US GDP would at most lose -0.2% from what it would be otherwise - a virtual rounding error.
As a result of the turmoil, no inflation, and still tepid consumption, the Fed is surely on hold for July, and is quite likely on hold for September. Financial markets see only a 13% chance of a hike in 2016 at all, and they even project an 8% chance of a rate cut by September. But these projections are probably still over-reacting to the Brexit vote and we think they will moderate soon. EH does not expect to see a rate cut in the near future.
https://www.creditkarma.com/ Economic News: Brexit, Tepid Consumption, Inflation and Profits Put Fed Reserve on Hold | |
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