Instant View: US Feb PCE price index shows inflation keeps cooling

NEW YORK (Reuters) – U.S. consumer spending rose moderately in February, likely payback after surging the prior month, and while inflation showed signs of cooling it remained elevated, which could see the Federal Reserve raising interest rates one more time this year.

The personal consumption expenditures (PCE) price index increased 0.3% last month after accelerating 0.6% in January. In the 12 months through February, the PCE price index advanced 5.0% after rising 5.3% in January. Excluding food and energy, the PCE price index climbed 0.3% after increasing 0.5% in January. The core PCE price index rose 4.6% year-on-year after gaining 4.7% in January. The Fed tracks the PCE price indexes for its 2% inflation target.

MARKET REACTION:

STOCKS: extended slight gains and were up 0.2%, pointing to a firm open on Wall Street

BONDS: The yield on slipped and was down 2.3 basis points at 3.528%; The two-year U.S. Treasury yield, pared a gain was up 1.1 basis points at 4.110%

FOREX: The Euro was pared a slight loss and was off 0.17% and the was steady

COMMENTS:

ROSS MAYFIELD, INVESTMENT STRATEGY ANALYST, BAIRD, LOUISVILLE, KENTUCKY

“The data came in a little bit better than expected which will be a benefit to the Fed. I think seeing spending tick down, seeing prices ticked down, especially core PCE under 5%.”

“But this data is probably before the banking crisis kicked in. So, it’ll be valuable for the Federal Reserve, and it will help them paint the picture of inflation but I think a lot has changed for their calculus since this data was relevant. So, I don’t know if it’ll have as much of an impact on what the Fed is going to do as it might have in another month or another situation.”

QUINCY KROSBY, CHIEF GLOBAL STRATEGIST, LPL FINANCIAL, CHARLOTTE, NORTH CAROLINA

    “The equity market seems to be delighted with the slight tick lower in inflation, as it should be, because it underscores that the Fed’s campaign is in fact working, albeit slowly. The immediate reaction in the Treasury market confirmed that, because we saw the yields tick down. To be sure, this does suggest still that the Fed raises rates at the May meeting, absent another pocket of concern in the banking sector or commercial real estate sector. This report does nothing to suggest the Fed pauses at the next meeting.”

BRANDON PIZZURRO, DIRECTOR OF PUBLIC INVESTMENTS, GUIDESTONE CAPITAL MANAGEMENT

“As the Fed rate hikes are now kind of starting to take hold right about a year later since they first began, perhaps is a sign that their hikes are starting to cool inflation.” “But in terms of the Fed’s calculus, they’ll have to have more confirmation that disinflation is really taking hold beyond just a few data points here and there.”

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK 

  “The numbers are a little bit better and are pointing to inflation coming down and that should be positive for stocks today. It also should indicate that the Fed is likely to pause in May, since the overall direction in inflation is headed lower now. The numbers are still elevated, but they’re going in the right direction.” 

“The big drop obviously is in energy prices so that is indicative of the fact that transitory inflation is coming down. There is some structural inflation that’s coming down as well so that’s good news and that’s going in the right direction.”

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