On Friday at 20:30 GMT, the U.S. Commerce Department’s Bureau of Economic Analysis released data that the U.S. core PCE price index recorded an annual rate of 3.4% in May, a new high since April 1992; the monthly core PCE price index recorded 0.5%, lower than the expected 0.6%.
The monthly rate of U.S. personal spending in May recorded zero, with the previous value revised upward to 0.9% from 0.5%.
Following the release of the data, spot gold briefly advanced $3 to a high of $1790.18/oz, up 0.87%, while spot silver advanced nearly $0.1 in 5 minutes, while the dollar index briefly moved 10 points lower.
For the U.S. personal spending stalled in May, agencies said it reflected a decline in goods spending, while closely watched inflation indicators continued to climb.
After a record plunge in April, U.S. personal income is expected to shrink further in May as stimulus measures wind down and the economy accelerates its recovery, while spending is expected to rise modestly – but still less than in April.
Citi said the increase in spending is largely due to higher prices for components such as airline tickets, rental cars and used cars, and while these unusually strong price increases should ultimately be temporary, the very strong price increases are likely to continue for another month or two.
On the income side, government wages rose 3.5% year-over-year, well above the 1.3% increase in April, while private sector workers’ wages rose 15.7% year-over-year, down from a record 19.3% increase in April.
The shift in spending and income has caused the savings rate to fall, meaning that money has become more liquid.
This brings us to the most important aspect of today’s data – the Fed’s most watched inflation indicator – the core PCE price index rose at an annual rate of 3.4% year-over-year in May, the highest level of core inflation since 1991.
Commenting on the annual rate of the U.S. core PCE price index in May, the financial website Forexlive said.
“The inflation data was in line with expectations, much to the relief of markets and Fed members who were worried about runaway inflation. Personal spending continues to adjust due to reductions in stimulus spending and benefits. It is difficult to predict how to balance reopened spending and higher savings rates during the epidemic.”
Is the Fed’s turn to hawkishness firm?
This comes after a number of Fed officials let their hawks set off the market and investors fear a rate hike as soon as next year. The U.S. dollar index surged 1.8 percent last week, posting its biggest one-week gain since last September and rising to a two-month high.
Although many people believe that the Fed has turned hawkish, but in fact the Fed may be more dovish than when it first started talking about bringing inflation “back”. This is good for risk assets.
Because even by the Fed’s own estimates, by January 2022, 24 months of inflation will average 2%. If the Fed hasn’t tightened monetary policy by then, it will be much more dovish than it was in 2017 when it first started talking about symmetric inflation targeting.
This means that all other things being equal, U.S. Treasury yields, as well as discount rates, should be lower and the net present value of cash flows over the next five, 10 and 20 years will be higher. This constitutes a positive for assets with higher risk and longer duration.
Goldman Sachs strategists also said that given the fundamentals, the long-term outlook for dollar weakness is unchanged. There are three reasons for this.
First, the dollar is still overvalued by about 10% on a trade-weighted basis, according to Goldman’s standard model. Coupled with emerging market rate hikes and strong returns in non-U.S. developed market equities, the resulting portfolio outflows are likely to weigh on the dollar, and the potential for dollar weakness is high.
Second, Goldman Sachs believes that “market expectations for Fed tightening may be too high.”
Finally, Goldman Sachs expects strong growth in most economies in the second half of 2021, and other central banks will need to consider abandoning accommodative policies.
Some industry insiders are concerned that this surge in the dollar index will likely force the huge short camp to close positions, which is expected to accelerate the dollar’s immediate rally.