The stock market should continue to be subject to developments in the Iran war this week. It also may trade cautiously into the release of the May PCE Deflator on Thursday, now that the new Fed Chair Warsh emphasized the Fed's intent to bring down inflation. A below-consensus, trend-like print can't be ruled out, which, however, still might not resolve the question whether the Fed will hike rates at the next FOMC Meeting on July 28-29. Warsh said that the current trend in inflation is too high.
Warsh was adamant that the Fed will bring down inflation, repeating this promise many times at his news conference. In some sense, his reiterations sounded as if he "protested too much," perhaps because he had to free himself from his earlier message that rates should be lowered. Jawboning like this could allow the Fed to hold back tightening, ironically. Indeed, his emphatic statements have already led to anti-inflation market developments -- a stronger dollar and lower commodity prices. However, asked why the Fed did not hike at the meeting he suggested the question could be addressed at the July FOMC Meeting. So, the risk of a rate hike then remains.
This week's May PCE Deflator will be the last Deflator release before the July FOMC Meeting. It's possible some Fed officials may get an early look at the June PCE Deflator in time for the Meeting, however. The June CPI will have been released, as well.
Consensus looks for +0.3% m/m in the Core PCE Deflator for May The y/y would rise to 3.9% from 3.8%, assuming no revisions to prior months. The Core needs to average 0.2% m/m from May through December to keep the y/y at 3.8% by year end. Such a below-consensus print for May can't be ruled out, inasmuch as the May Core CPI already printed 0.2%. However, a 0.2% print might have to be from a low un-rounded increase (for example, 0.15% -- annualized, 1.8%) to be Fed-friendly. A 0.1% print would be a market positive.
It is not clear what measure of the PCE Deflator will be emphasized by the Fed. Presumably, the Inflation Task Force, one of the five he is establishing, will provide guidance later this year. Meanwhile, the market may focus on the Trimmed version of the PCE Deflator, which in the past Warsh has said is preferable. The latest figures show this measure to be close to the Fed's 2% target:
One-month PCE inflation, annual rate
| 25-Nov | 25-Dec | 26-Jan | 26-Feb | 26-Mar | 26-Apr | |
| PCE | 2.7 | 4.0 | 4.0 | 4.9 | 8.3 | 4.9 |
| PCE ex F&E | 2.2 | 4.0 | 5.2 | 4.9 | 3.6 | 2.9 |
| Trimmed mean | 1.7 | 2.2 | 2.6 | 2.0 | 2.9 | 2.5 |
Six-month PCE inflation, annual rate
| 25-Nov | 25-Dec | 26-Jan | 26-Feb | 26-Mar | 26-Apr | |
| PCE | 2.8 | 2.9 | 3.2 | 3.5 | 4.4 | 4.8 |
| PCE ex F&E | 2.7 | 2.8 | 3.2 | 3.5 | 3.8 | 3.8 |
| Trimmed mean | 2.3 | 2.1 | 2.2 | 2.0 | 2.2 | 2.3 |
12-month PCE inflation
| 25-Nov | 25-Dec | 26-Jan | 26-Feb | 26-Mar | 26-Apr | |
| PCE | 2.8 | 2.9 | 2.9 | 2.9 | 3.5 | 3.8 |
| PCE ex F&E | 2.8 | 3.0 | 3.1 | 3.0 | 3.2 | 3.3 |
| Trimmed mean | 2.5 | 2.4 | 2.4 | 2.3 | 2.4 | 2.3 |
Although Warsh said the labor market is on the right track, with job growth matching population growth, the latest Unemployment Claims data hint at some softening. So far in June, both Initial and Continuing are above their May averages (see table). They suggest that layoffs have risen and hiring restrained. If the higher levels are sustained, they would suggest a slowdown in June Payrolls. This outcome may be a restraining consideration at the next FOMC Meeting.
Latest in June May Average
Initial Claims 226k 212k
Continuing Claims 1.810 Mn 1.778 Mn
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