LIVE MARKETS Spending, income, inflation, sentiment: Consumers sing the blues

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Friday's data joined in unison to sing a song in a minor key about the consumer, who contributes about 70% to the U.S. economy.

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U.S. consumers tightened their purse strings in December even as income edged higher, according to the Commerce Department's Personal Consumption Expenditures (PCE) report. read more

Adjusted consumption (USGPCS=ECI) dropped 0.6%, inline with consensus, and a reversal of November's downwardly revised 0.4% growth.

"Spending was hit hard by a combination of the Omicron hit to discretionary services and people’s willingness to visit malls, alongside a void left by earlier-than-usual holiday shopping," writes Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Personal income (USGPY=ECI) grew by 0.3%, and while a cooler number that analysts expected, it stands on the shoulders of the previous month's upwardly revised 0.5% increase.

As a result, the saving rate - the difference between disposable income and outlays - grew to 7.9%.

The saving rate is viewed by many as a gauge of consumer sentiment, about which the University of Michigan has a few things to say, further down.

Personal consumption

But first, the more closely watched element of the PCE report - the price index (USPCE=ECI) - showed a slightly cooler than expected monthly gain of 0.4%, a welcome deceleration from the prior month's 0.6% increase.

But year-over-year growth of Core PCE (USPCE2=ECI) - which strips out volatile food and energy prices, and is the Fed's preferred inflation yardstick - came in 10 basis points higher than anticipated at 4.9%, hotter than November's 4.7% print.

Powell & Co have made it clear, particularly this week, that they intend to take off their gloves and combat stubbornly persistent inflation by hiking key interest rates more aggressively than many market participants expected.

Fed funds futures now see five such hikes happening this year, starting in March.

"The latest data support officials' pivot towards addressing high prices by ending asset purchases and initiating rate hikes which will be followed by balance sheet normalization," writes Rubeela Farooqi, chief U.S. economist at High Frequency Economics.

The graphic below shows Core PCE, along with other major indicators, and how long they've soared well above the central bank's average annual 2% inflation target.


The mood of the consumer grew chillier than originally thought in January, dropping to a decade low according to the University of Michigan's final Consumer Sentiment reading (USUMSF=ECI).

The index came in 1.6 lower than the initial take to 67.2, a steeper drop than expected, as consumer attitudes regarding current conditions and near-term expectations both deteriorated more than economists anticipated.

"Although their primary concern is rising inflation and falling real incomes, consumers may misinterpret the Fed's policy moves to slow the economy as part of the problem rather than part of the solution," writes Richard Curtin, chief economist at UMich. "The danger is that consumers may overreact to these tiny nudges, especially given the uncertainties about the coronavirus and other heightened geopolitical risks."

One-year and five-year inflation expectations held firm at 4.9% and 3.1%, respectively. Of note, UMich one-year expectations and PCE core inflation are in agreement.


Finally, employment costs (USEMPC=ECI) rose by 1% in last year's closing months, 0.2 percentage points shy of consensus, while wages in the fourth quarter increased at a slightly faster 1.1% pace, according to the Labor Department. read more

"With labor participation creeping higher, and measures of excess demand flattening in recent months, it is reasonable to think that wage growth is unlikely to re-accelerate dramatically," says Shepherdson. "In the meantime, this report eases the immediate pressure on the FOMC to act aggressively; the sighs of relief from Fed Towers should be audible on Wall Street."

Employment costs

Wall Street once again ping-ponged between green and red and back again in a continuation of a tumultuous week marked by mixed earnings, Fed worries and rising geopolitical tensions.

At last glance, the S&P (.SPX) and the Nasdaq (.IXIC) are green and the Dow (.DJI) is down. But blink, and they'll change.

(Stephen Culp)



Wall Street's major averages are losing ground on Friday after data showed U.S. consumer spending fell in December, suggesting the economy lost speed amid snarled supply chains and raging COVID-19 infections, while annual inflation increased at a pace last seen in the early 1980s. read more

Equity futures had gained ground as the data was released indicating some investor relief that inflation, which still high, was inline with expectations. But while the indexes opened up they quickly reversed to turn red shortly after the open.

Also, major banks were adjusting their expectations for Federal Reserve interest rate hikes, expected to kick off in March of this year with Bank of America economists saying Friday that they now expect the Federal Reserve to hike rates by 25 basis points seven times this year to battle inflation. read more

"What the market wants to know now is whether or not Monday's low will hold in the major indices. They want to see earnings are strong enough to offset the future tightening from the Fed," said Adam Sarhan, chief executive of 50 Park Investments.

"The reason we've so much volatility is because we have so much uncertainty. You just don't know what's going to happen with respect to Fed tightening ... Will it tighten too much and send us into a recession or will it be a soft landing."

Here is your morning trade snapshot:

Wall Street turns red

(Sinéad Carew)



The percentage of individual investors with a bearish outlook for the U.S. stock market hit a 9-year high in the latest American Association of Individual Investors Sentiment Survey (AAII).

AAII reported that bearish sentiment, or expectations that stock prices will fall over the next six months, gained by 6.2 percentage points to 52.9%, holding above its historical average of 30.5% for the 10th-consecutive week. Additionally, this particular reading is the highest since April 11, 2013 (54.5%)and is the 41st highest reading of bearish sentiment in the survey’s history.

Bullish sentiment, or expectations that stock prices will rise over the next six months, rose by 2.2 percentage points to 23.1%, which is still substantially below its historical average of 38.0%. Bullish sentiment levels have now been below the historical average for 10-straight weeks.

Neutral sentiment, or expectations that stock prices will stay essentially unchanged over the next six months, slid by 8.4 percentage points to 23.9%. Neutral sentiment was last lower on September 2, 2021 (23.2%).

With these changes, the bull-bear spread fell to –29.8 from -25.8 last week read more . This is the most negative the spread has been since April, 2013:


(Terence Gabriel)



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Terence Gabriel is a Reuters market analyst. The views expressed are his own

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