LIVE MARKETS-Too darn hot? Friday data suggests the summer could be a scorcher – Reuters

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LIVE MARKETS-Too darn hot? Friday data suggests the summer could be a scorcher – Reuters

  • Major U.S. stock indexes green; chips lead
  • Euro STOXX 600 index up ~0.6%
  • Dollar, crude edge higher; gold dips; bitcoin down >4%%
  • U.S. 10-Year Treasury yield ~1.59%

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Market participants sailed into the holiday weekend on Friday on a raft of economic data which appeared to kick off the summer with signs of an economy heating up.

The consumer spent at an accelerated pace in April USGPCS=ECI, rising as expected by 0.5%, despite a 13.1% plunge in personal income USGPY=ECI, according to the Commerce Department’s Personal Consumption Expenditures (PCE) report. (Full Story)

The income plunge, while not as steep as the 14.1% drop anticipated by economists, was the largest on record, and largely due to the come-down from the previous month’s stimulus rush.

“Consumers paused to catch their breath in April after going on a shopping spree in March,” writes Gregory Daco, chief U.S. economist at Oxford Economics (OE). “But don’t be fooled…we foresee real consumption growth around 9.5% this year – the strongest performance since 1946.”

Together, the income plunge and spending increase brought the saving rate – the difference between outlays and disposable income – down from the stratosphere, although it still remains elevated compared with the historical average.

The saving rate is seen by many as a barometer of consumer expectations. A worried consumer feeds the piggy bank.

This elevated savings, along with generous fiscal stimulus, has added fuel to the demand fire as vaccine deployment and lifting restrictions prompt consumers to re-engage economically.

In turn, materials producers, which largely curbed operations at the onset of the pandemic, are struggling to come back online. The resulting imbalance has sent commodity prices higher.

The PCE price index USPCE=ECI rose 0.6% in April, running hotter than the 0.5% consensus.

“It’s a big monthly rise, but it was expected, and the Fed has been telegraphing that we’ll see inflation over the next couple of months,” says Peter Cardillo, chief market economist at Spartan Capital Securities in New York. “But the Fed keeps saying it will be transitory and to me that’s a question mark.”

The year-on-year core PCE index USPCE2=ECI – which strips out volatile food and energy prices and is the Fed’s pet inflation yardstick – jumped by 3.1% in April, blowing past the central bank’s average annual 2% inflation target.

It was the measures largest gain since 1992.

The graphic below shows how core PCE, along with most other indicators, have shot above that target:

Other data released on Friday showed factory activity in the midwest put the pedal to the medal this month, growing at its fastest pace in nearly half a century. (Full Story)

The Chicago purchasing managers’ index (PMI) USCPMI=ECI unexpectedly jumped to a reading of 75.2 according to MNI Chicago versus the deceleration to 68 analysts expected.

“This startling reading – the highest since November 1973 – appears inconsistent with the message from other regional surveys and China’s Caixin PMI, which tends to lead the U.S. surveys,” writes Ian Shepherdson, chief economist at Pantheon Macroeconomics.

The busy Commerce Department also released its advance take on goods trade balance USGBAL=ECI and wholesale inventories USAWIN=ECI for the month of April.

The gap between the value of goods imported to the U.S. and American-made exports narrowed to $85.23 billion, suggesting an overseas demand revival.

“Exports recorded a gain as external demand continued to heal,” says Oren Klachkin, lead U.S. economist at OE. “Shipping bottlenecks and supply chain challenges will impede trade flows, but shipments will ultimately be dictated by the strength of recoveries at home and abroad.”

Inventories in wholesalers’ warehouses increased by 0.8%, in a welcome sign that supply chains could be coming back online.

Finally, the University of Michigan offered its final take on Consumer Sentiment USUMSF=ECI for the outgoing month, which ticked higher to 82.9, as expected.

The data put investors in a buying mood by late morning trading.

All three major U.S. stock indexes were green, with chips .SOX out front.

(Stephen Culp)