Let’s start with the US economy where we continue to see debate around the trajectory of inflation rates.
The Fed economists view the core PCE price index as the most important inflation indicator for the US. And on Monday that measure came in softer than forecast. This plays into Janet Yellen’s recent skepticism about the sustainability of the latest uptick in inflation.
However, not everyone agrees. Capital Economics calls Yellen’s dismissal of the recent pickup in inflation “cavalier”. Of course much depends on the direction of the US dollar and the long-awaited acceleration in wage growth.
Source: Capital Economics, h/t @valuewalk
Investors are indeed becoming concerned about inflation as flows into inflation-linked treasury (TIPS) funds jump.
Source: @ReutersJamie, BAML
Capital Economics is correct in arguing that services are becoming more important when looking at inflation. US consumer spending on services as a percentage of total spending hit a new record. Much of the recent increase is due to the decline in prices of imports and energy while service costs continue to climb. Your dentist or barber will continue to raise prices in spite of gasoline being cheaper.
Source: @SoberLook
Staying with the US economy, here is the updated Atlanta Fed US GDP tracker for Q1-2016 (discussed yesterday).
Source: @AtlantaFed
While Q1 looks terrible indeed, we see a number of positive signals for the US economy going forward.
1. The Goldman Economic Surprise index has recovered from recent lows.
Source: @boes_
2. A number of economists are quite bullish the US consumer. Here is Natixis.
Source: Natixis
Indeed, retail-focused shares are outperforming this year.
Source: Ycharts.com
3. US pending home sales came in stronger than forecast in spite of low inventories.
4. We may finally be seeing some stabilization in the US manufacturing sector. The index that combines regional Fed manufacturing indices spiked this month.
