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04 29 2016 | by Victor Xing | Economics

March PCE and headwinds to a June rate hike

Economic data and Fed policy overview

March PCE (personal consumption expenditures, Federal Reserve’s preferred measure of inflation compensation) came in below consensus: month-over-month headline and core PCE at 0.054% and 0.052% (year-over-year at 0.83% and 1.56%), respectively.  These figures were rounded up to 0.1% MoM on Bloomberg terminal, but markets reacted accordingly to reprice rate hike probability to less than 1 hike for the rest of the year.

Nevertheless, services inflation (67% of the aggregate index) remained firm at 0.151% MoM and 2.091% YoY, while disinflationary headwind largely came from durable goods at -0.347% MoM and -1.592% YoY.  The decline in durable goods is in-line with an earlier report from the Census Bureau.

The highly anticipated employment cost index (ECI) met expectations at 0.6% QoQ and 1.9% YoY.  This report breaks down to two components: (nominal) wage and benefit growth.  The former rose at a healthy quarterly 0.7%, while latter’s 0.5% QoQ growth weighed on aggregate compensation.

On the Federal Reserve communication front, the first post-FOMC speech by Dallas Fed President Kaplan (non-voter) echoed Atlanta Fed President Lockhart’s earlier views that Brexit will factor into U.S. monetary policy considerations.  He warned about Sterling’s “sudden depreciation” on Brexit as well as knock-on impacts on global economic and financial conditions.  Nonetheless, President Kaplan is open to another rate hike in June or July “if the second-quarter data is firming.”  Similar to Boston Fed President Rosengren’s April 18th warning that financial markets are “too pessimistic about the economy” and pricing in an “exceptionally shallow” rate path, President Kaplan warned that “market may well be underestimating how soon we might move next.”

Finally, Atlanta Fed’s GDPNow released its initial projection of Q2 GDP at 1.8% seasonally adjusted annual rate.

Taking today’s data and communication as a whole, weakness in the March PCE overshadowed the decent but on-consensus ECI, and President Kaplan further coupled Brexit risks with Fed policy (a net negative on the likelihood of June hike).  The soft Atlanta Fed GDPNow would further bolster Federal Reserve’s cautious policy stance.

All eyes will be on next week’s ISM data and Payrolls, as well as additional Fed speeches.

March PCE


  • Headline PCE at 0.054% vs. 0.1% consensus and -0.0982% prior
  • Core PCE at 0.052% vs. 0.1% survey and 0.162% prior
  • Energy goods and services at 1.115% vs. -6.477% prior
  • Services at 0.151% vs. 0.142% prior
  • Durable goods at -0.347% vs. -0.271% prior
  • Goods at -0.157% vs. -0.612% prior
March PCE
Both headline and core PCE missed expectations


  • Headline PCE at 0.825% vs. 0.992% prior
  • Core PCE at 1.563% vs. 1.716% prior
  • Energy goods and services at -12.68% vs. -12.38% prior
  • Services at 2.09% vs. 2.15% prior
  • Durable goods at -1.59% vs. -1.38% prior
  • Goods at -1.79% vs. -1.39% prior

March PCE

Q1 Employment Cost Index (ECI)

  • Total compensation at 0.639% QoQ vs. 0.6% consensus and 0.482% prior
  • Wages at 0.728% QoQ vs. 0.488% prior
  • Benefits at 0.466% QoQ vs. 0.625% prior
March PCE
ECI rose as expected with wage growth outpaced benefits

Atlanta Fed GDPNow

Atlanta Fed’s Q2 GDP nowcast stands at 1.8% on April 29

March PCE
Atlanta Fed GDPNow

Next article04 27 2016 | by Victor Xing | Central Banks

April FOMC: concerns ease over global risk factors