Low Inflation, Marginal Consumer Spending Fuel ‘Risk-Off’ Trade

Given Fed Chair Powell’s comments about a rate hike and Thursday’s inflation data, don’t bet on a rate increase anytime soon. Federal Reserve Chairman Jerome Powell said on Wednesday “we would need to see a really significant move up in inflation that’s persistent before we would consider raising rates to address inflation concerns.”
James Hyerczyk
Stocks Down, Risk Off

While traders continued to digest the impact of the Fed’s decisions on Thursday as well as new developments over U.S.-China trade negotiations, there were fresh economic reports that influenced the trade in the Treasury, gold and currency markets. All of the moves were tied to demand for risky assets with Thursday being a “risk-off” session.

With risk-off, sellers hit the equity indexes. December E-mini S&P 500 Index futures settled at 3035.75, down 12.00 or -0.40%. December E-mini Dow Jones Industrial Average futures finished at 26982, down 150 or -0.56% and December E-mini NASDAQ-100 Index futures closed at 8090.25, down 21.00 or -0.26%.

Money flowed into the lower-yielding U.S. Treasury instruments, gold and Japanese Yen. December Comex gold settled at $1514.80, up $18.10 or +1.21% and the Japanese Yen closed at 108.022, down 0.822 or -0.76%.

U.S. Economic News

Stocks were under pressure early in the session, driving up the lower yielding assets after the Chicago Business Barometer dropped to 43.2 in October. That mark’s the barometer’s lowest reading since 2015 and its second straight monthly decline. A reading below 50 indicates contraction.

Overall, data on Thursday showed a marginal rise in consumer spending in September, casting doubts on consumer’s ability to continue driving the economy.

Monthly U.S. Consumer Spending

U.S. consumer spending rose marginally in September while wages were unchanged, which would cast doubts on consumers’ ability to continue driving the economy amid a deepening slump in business investment.

The Commerce Department said on Thursday consumer spending, which accounts for more than two-thirds of U.S. economic activity, gained 0.2% last month as households stepped up purchases of motor vehicles and spent more on healthcare.

Data was revised up to show consumer spending climbing 0.2% instead of the previously reported 0.1% rise. Economists polled by Reuters had forecast consumer spending would advance 0.2% last month.

Quarterly U.S. Consumer Spending

On Wednesday, the U.S. government reported the economy grew at a 1.9% rate in the third quarter after expanding at a 2.0% pace in the April-June period.

The government reported that growth in consumer spending slowed to a still-healthy 2.9% annualized rate last quarter after surging at a 4.6% pace in the second quarter, the fastest since the fourth quarter of 2017. That softened some of the blow on the economy from a deepening slump in business investment.

Fed’s Favorite Inflation Indicator

Inflation was tame in September. Consumer prices as measured by the personal consumption expenditures (PCE) price index were unchanged for a second straight month in September as the cost of energy goods and services dropped 1.3%.

In the 12 months through September, the PCE price index increased 1.3% after rising 1.4% in the 12 months through August.

Excluding the volatile food and energy components, the PCE price index was also unchanged last month after gaining 0.1% in August. That lowered the annual increase in the so-called core PCE price index to 1.7% in September from 1.8% in August.

The core PCE Index is the Fed’s preferred inflation measure and had undershot the U.S. central bank’s 2% target this year.

Don’t Bet on Rate Hike Any Time Soon

Given Fed Chair Powell’s comments about a rate hike and Thursday’s inflation data, don’t bet on a rate increase anytime soon. Federal Reserve Chairman Jerome Powell said on Wednesday “we would need to see a really significant move up in inflation that’s persistent before we would consider raising rates to address inflation concerns.”

The core PCE index has climbed this year, but remains well below the Fed’s 2% target.

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