Personal spending and income came in roughly in line with expectations, though the former printed slightly lower, suggesting that personal consumption should continue to improve in the third quarter. Moreover, June’s personal spending was revised to the upside from a flat reading to +0.2%m/m. However, investors should remain cautious regarding the outlook as Hurricane Harvey will surely weigh on those measures in the coming months.
On the inflation front, the Fed’s favourite gauge of inflation matched expectation with the core personal consumption expenditure printing at 1.4%y/y in July, down from 1.5% in the previous month. This lacklustre inflation data if of bad omen for the Fed monetary policy normalization process. However, the economy has recently gather momentum and it should translate into a pick-up in consumer prices at some point.
The August’s jobs report, which is due for release later today, will be key to restore confidence in the inflation outlook. Indeed, a strong read in average hourly earnings will likely please investors as it should, at some point, help to lift inflation as US workers have more disposable income. Wages are expected to rise 2.6%y/y in August, up from 2.5% in the previous month. After printing at 209k in July, NFPs are anticipated to come in at 180k. We remain cautious regarding August data in general as it has proved to be subject to significant statistical distortions. Therefore investors will most likely ignore NFPs to focus on wages data.
EUR/USD has bounced back in late European session yesterday after free falling as much as 2% over the last three days. With the ECB meeting taking place next week, investors are in a period expectancy as they try to determine whether Draghi will make one step back amid a strengthening single currency. We still anticipate that Draghi will under-deliver and Yellen announce the beginning of the balance sheet unwinding program.
By Arnaud Masset
