The Federal Reserve’s preferred inflation measure came in as forecast in April, but underlying price pressures cooled, slightly raising odds on an easing cycle beginning in the autumn months. Data released by the Bureau of Economic Analysis this morning showed the core personal consumption expenditures index rising 0.3 percent in April from the prior month, matching market forecasts. On a year over year basis, base effects saw core price growth stabilising at 2.8 percent, the same as in March, aligning with economist estimates.
The overall personal consumption expenditures index was up 0.3 percent from the prior month, 2.7 percent higher than a year ago. Personal income rose 0.3 percent month-over-month, decelerating from March’s 0.5-percent pace. Inflation-adjusted household spending fell -0.1 percent, slowing from a revised 0.1-percent gain percent in the prior month, and undershooting expectations. The savings rate, which can offer a preview of future spending capacity, held at 3.6 percent, but remains down from 5.2 percent a year ago as lower-income consumers spend beyond their means.
Jerome Powell’s favoured “supercore” inflation measure – core services excluding housing rents – decelerated to 0.27 percent month-over-month from a revised 0.42 percent in the prior month, easing to 3.429 from 3.482 percent year-over-year in April. Housing and utility costs, health care, transportation services and other categories all slowed, while financial services and insurance – heavily influenced by rising markets and auto insurance costs increased.
Treasury yields are pushing downward across the curve as traders move to upgrade odds on an easing cycle beginning by year end, and the dollar is moving lower against its major rivals on a narrowing in relative rate differentials. With price growth cooling in line with a slowing economy, we think Fed officials will begin firmly signalling rate cuts by late August.
In theory, this suggests that the dollar’s outperformance should fade somewhat – but background volatility is unlikely to remain near its current depressed levels in the face of growing political and macroeconomic uncertainty, and the greenback could stage a rebound as the US election approaches.
Separately, the Canadian economy expanded less than expected in the first quarter, helping bolster market-implied odds on a pivot to easing by the Bank of Canada at next week’s meeting. Numbers released by Statistics Canada this morning show real gross domestic product missing forecasts with a 1.7 percent annualised expansion in the first three months of the year, well below the 2.2 percent consensus estimate, and coming on the heels of a downwardly-revised 0.1-percent print in the last quarter of 2023.
Perhaps most meaningfully, a preliminary estimate showed real gross domestic product growing 0.3 percent month-over-month in April, well below our own circa-0.8-percent projections.
The Canadian dollar is coming under pressure as growth expectations fall relative to the United States – and as traders bet on an earlier start to the Bank of Canada’s easing cycle – but with the US dollar coming down simultaneously, price action has been limited thus far. A rate cut at next week’s meeting now looks more likely than not, but this has been priced in for months – so the loonie’s near-term direction could be set by developments in the US over the coming weeks.
