Economic growth in the United States is percolating which might make it difficult for the Federal Reserve to halt raising rates. With Q2 GDP notching up a 4.2% gain year over year, investors might alter their views with back to back 4% gains.  Consumer spending was stronger than expected and it now appears that inflation hit the Fed’s target. Stronger inflation will help buoy the dollar, and could halt the current risk on trade.

The commerce department reported that consumer spending grew more than expected in July which will help buoy economic growth.  You can track US consumer spending on the Vestle economic calendar. Spending increased by 0.4% in July, more than the 0.3% that was expected. Restaurants and lodging were the driving force behind the rise. This is the second consecutive month of a 0.4% rise in spending.

Real consumer spending which is adjusted for inflation rose 0.2% in July after rising 0.3% in June.  This tells you that inflation is on the rise. Year over year spending rose at 3.8% in the Q2 following a 0.5% increase in the Q1 of 2018. Spending on services rose 0.4% in July following a 0.6% increase in June. Purchases on goods rose 0.2%.

Inflation Hits Feds Target

Core personal consumption expenditures, is the Fed’s favorite way to gauge to monetary inflation which rose by 2% year over year in July, up from 1.9% year over year in June. The Fed’s core target is 2%, which represents neutral policy. The year over year increase shows that positive inflation momentum is rising.  The core PCE hit 2% for the first time in 6-years in March, and the current reading is the 3rd time inflation has hit the 2% mark in 2018.

This means that the Fed is more likely to continue to raise interest rates into the Q4 of 2018. Currently, the December Fed futures contract is pricing in a 60% chance that the Fed will increase interest rates at the December monetary policy meeting.  Personal consumption expenditures excluding food and energy (core) rose 0.2% month over month following a 0.1% increase in June.

Personal income was also robust. July personal income increased by 0.3% following a 0.4% increase in June. Savings dipped to 6.7% from 6.8% in June.  Wages continued to edge higher in July rising by 0.4%.

How Could This Effect the Markets?

US yields moved lower following the central bank symposium held in August in Jackson Hole Wyoming. There, speeches and commentary from Fed officials appeared to be dovish, allowing the treasury yield to continue to slide down to the 2.80% level. This took pressure off the US dollar, which allowed riskier assets to rise.  Next week, the unemployment report will drive market sentiment, but will not be released until Friday. 

The consumer spending and personal consumption expenditures report, shows that spending and growth continue to accelerate.  Riskier asset such as stock prices in the US are at all-time highs, and appear to be breaking out.  The acceleration in risk will provide the backdrop for the Fed to tighten rates further which will help buoy the dollar.