U.S. inflation accelerates in January, consumer spending surges By Reuters

NEW YORK (Reuters) – U.S. consumer spending rebounded sharply in January amid strong income growth, while inflation accelerated, which could add to financial markets fears that the Federal Reserve could continue raising interest rates through summer.

The personal consumption expenditures (PCE) price index, tracked by the Federal Reserve for monetary policy, shot up 0.6% last month after gaining 0.2% in December. In the 12 months through January, the PCE price index accelerated 5.4% after rising 5.3% in December.

Excluding the volatile food and energy components, the PCE price index increased 0.6% after climbing 0.4% in December. The so-called core PCE price index increased 4.7% on a year-on-year basis in January after advancing 4.6% in December.

MARKET REACTION:

STOCKS: U.S. stock index futures extended losses. BONDS: U.S. Treasury bond yields rose.FOREX: The U.S. dollar extended gains against the euro and yen.

COMMENTS:

BRIAN JACOBSEN, SENIOR INVESTMENT STRATEGIST, ALLSPRING GLOBAL INVESTMENTS, MENOMONEE FALLS, WISCONSIN

“Honestly, I’m surprised people were surprised by the PCE data. We already knew retail sales in January were stronger than expected. We also knew from the CPI data that inflation was hotter than expected. There were a few informative details, like the strong gain in wages. We’ll probably see a reversal of these strong January numbers when the February numbers come out. This is more like a speedbump on the road to disinflation than a change in the trend.”

KEN MAHONEY, CHIEF EXECUTIVE OFFICER, MAHONEY ASSET MANAGEMENT (VIA EMAIL)

“So we’ve had CPI higher, PPI higher, and PCE much higher, and the quick reaction is a major whoosh down today.”

“There has been a spending surge and the Fed does not like that. They are trying to slow down the economy to slow inflation and the market is seeing this as this as a sign to potentially keep rates higher for longer. We had six months of CPI coming down which was positive, so there must have been something going on last month or two with these higher numbers on consumer spending.”

“When the Fed says they’re data dependent, now its all about the data. We have 10-year Treasury (yield) close to 4%, after coming down earlier and this puts pressure on risk assets. The dollar is stronger and for multinational earnings, they (would) rather have a weaker dollar. We’ve seen pretty lackluster earnings from major companies for the most part, and with all the context here, its hard to for higher valuations to make sense.”

“We have higher, yields higher, market pointing lower – overall to us this is a risk off move – with all the indexes all lower the last three weeks on top of that. The bears are probably cheering as this is starting to look less and less like a new bull market and rather just another bounce/squeeze in a bear market.”

GENE GOLDMAN, CHIEF INVESTMENT OFFICER AT CETERA INVESTMENT MANAGEMENT, EL SEGUNDO, CA

“The headline and core PCE numbers were well above expectations. What worries us most is that the data since the last Fed meeting has been extremely strong. If the Fed had this data at the last meeting they probably would’ve raised by 50 bps and the tone from the press conference would’ve been a lot different.”

“The market reaction is appropriate. The 2-year Treasury yield is rising and stocks are falling because this suggests the Fed will be hawkish for longer than the market had hoped.”

“The big surprise was that while the personal spending was higher than expected but the savings rate picked up. Although its old data it continues to confirm that the economy was strong. If the Fed knew this they would’ve been more aggressive.”

“I’d say 50 basis points is on the table but we get a lot of data between now and the March meeting. The dot plot will be higher.”

RANDY FREDERICK, MANAGING DIRECTOR, TRADING AND DERIVATIVES, CHARLES SCHWAB, TEXAS”I expected the number to be hot and I think equities, having been fairly weak for the last five or six sessions, expected it to be a little high as well and it is. That’s consistent with what we’ve seen earlier on the consumer price index (and) producer price index, so it doesn’t surprise me.””We’ve already seen an increase in the probability of a rate hike going out two meetings from now.””I’d say at the very minimum right now, the probabilities are quite high we’re going to have three more quarter point rate hikes at the next three FOMC meetings, and this just simply reinforces what the Fed funds futures markets have already been telling us for the last couple of weeks which is that while we did see somewhat of a pause in inflation, it’s certainly not over and now we’re actually seeing a little bit of a rebound in it.”

BILL ADAMS, CHIEF ECONOMIST, COMERICA BANK, DALLAS, TEXAS

“The takeaway is that the economy is still growing solidly. Total inflation rose more than expected, so this is a further sign that inflation is sticky in early 2023 making it more likely that the Fed would keep interest rates higher for longer.”

“The stickier inflation is in early 2023, the more the Fed is going to put their foot on the brake pedal this year to slow down momentum. This is additional incremental evidence that the Fed will be more aggressive on interest rates which is a headwind for risk assets.”

PRIYA MISRA, HEAD, GLOBAL RATES STRATEGY, TD SECURITIES, NEW YORK

“The flattening of the yield curve makes sense, the front end. The pressure on the Fed remains high. This is increasing pressure on the Fed to keep going. They clearly have some work to do to slow the economy down and bring inflation back to 2%.”

“This is not good news for risk assets because this is going to keep pressure on the Fed.”

“It might put pressure on whether they go 50 basis points in March. That’s going to be a debate for the market. Do they increase the magnitude of hikes? That will be in focus.”

PHIL BLANCATO, CHIEF EXECUTIVE OFFICER, LADENBURG THALMANN ASSET MANAGEMENT, NEW YORK”This PCE number which to me is a vital number, it’s the Fed’s premier preferred gauge of measuring inflation clearly suggests that the Fed has more to do, now you’re looking at probably half of 1% rise in March.””They (Fed) are data dependent, and they are being somewhat careful to not overstep, but the good chance of 1/2 of 1% (hike) in March and then looking like a May and or June rise.””In other words, what this means is the Fed is not done, further pressure on yields to push higher, the battle against inflation has not yet won, and volatility for the stock market.”

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

“The number are hotter than expected. We’ll see pressure on yields, and we see stock futures going lower.”

“The Fed is probably going to be more hawkish. Whether that translates to a 50 basis-point rate hike in March remains to be seen. But we are likely to see three more rate hikes and the tightening cycle is likely to end in the second half of the year.”

“These are ugly numbers, and this is the Fed’s preferred index, so we should expect hawkishness until the second half of the year.”

“The economy remains strong. The surprising factor is the consumer. Consumers are spending.”