Inflation Within Fed’s Comfort Zone

The US Department of Commerce released the February consumer income and spending report today. Incomes increased by 0.5%, more than expected. Spending increased by 0.1%, in line with expectations. And perhaps most important, Personal Consumption Expenditures, the Fed’s favorite measure of inflation, came in at 0.1% expectations, last month’s PCE was revised down, and that brought one-year PCE to 2%. The Fed’s target for reasonable inflation is 1-2%, so FOMC inflation hawks like Dallas Fed president Richard Fisher and Fed Governor Frederic Mishkin, should calm down at least for now.

Mortgage bonds certainly calmed down on this news and put on a nice rally, bringing rates down by as much as .25% on the news. Markets tend to rally on tame inflation data because it’s an indication that the Fed may not hike rates anytime soon. When bond prices rise in a rally, yields, or rates, drop. Today was a big day for consumer data, and Monday and Tuesday are big days for manufacturing with the Chicago Purchasing Manager’s Index and the Institute for Supply Management Index on those respective days.

Chicago PMI is a precursor to the ISM Index and the latter is especially important because approximately 84% of the nations jobs are in the service/manufacturing sector. This is why these data releases always move markets.