Core PCE Slows, Consumers Are Resilient, Trump Tops 60% Election Odds
Theya is the world's simplest Bitcoin self-custody solution. With our modular multi-sig vaults, you decide how to hold your keys.
Whether you want all your keys offline, shared custody with trusted contacts, or robust mobile vaults across multiple iPhones, it's Your Keys, Your Bitcoin.
Download Theya on the App Store.
the cliff-notes:
- Core PCE rose just 0.08% in May, marking the smallest increase since late 2020, indicating easing underlying inflationary pressures.
- Consumer spending rebounded by 0.3% in May, coupled with solid household income growth, suggesting controlled inflation without significant harm to consumers.
- University of Michigan consumer sentiment for June rose to 68.2 from 65.6, with falling inflation expectations and improved current and forward confidence, supporting the Fed's current rate cut schedule.
Check out today's Theya Research post in video form 👇
Good afternoon everybody, and happy Friday.
This morning we got the final strikes for key economic data points for the month of June—with core PCE and the University of Michigan Consumer surveys being released. The core PCE report came in line with expectations, bolstering the Fed's current projected path of two 25-bps rate cuts before year-end.
The Federal Reserve's preferred inflation gauge, known as Core PCE (Personal Consumption Expenditures), remained largely flat in May—its lowest level since November 2020.
Core PCE, which excludes volatile food and energy items, rose by just 0.08% in May, marking the smallest increase since late 2020. This suggests that underlying inflationary pressures, the most stubborn ones in the basket, are easing.
Meanwhile, consumer spending showed resilience, increasing by 0.3% after a pullback in April. This rebound, coupled with solid growth in household incomes, offers hope that inflation can be brought under control without causing significant harm to consumers.
The combination of slowing inflation and steady consumer spending paints a positive picture for the economy moving forward:
Shifting gears to the University of Michigan's consumer sentiment report for the month of June, we got some surprises.
Unlike the inflation data which came in as expected, we got a surge in current and forward consumer confidence and a decline in inflation expectations.
Inflation expectations influence the path of inflation. If people think prices will rise, they'll increase their spending today to front-run the expected price increases, which accentuates those very price increases; conversely, if prices are expected to fall, people will hold off on spending, which accentuates the fall in prices.
The Fed loves to see inflation expectations falling, as they are now. 1-year inflation expectations have finally fallen to the level of 5-10-year inflation expectations. With consumers seeing price inflation as stable over both the near and long term, the consumer behavior of front-running price increases and exacerbating price inflation will be largely absent:
The final strike for June of University of Michigan consumer sentiment rose to 68.2 from 65.6 vs 66 expected. It is hovering above the official "contraction" line, where more respondents have negative sentiment than positive.
We spent the longest period of time on record in sentiment contraction during 2021 and into 2023 without a recession being officially declared. Since March, we've had a swift decline back down to that contraction level, but the survey has managed to hover above it, with respondents reacting favorably to current and forward economic conditions, as well as price inflation expectations.
This is phenomenal news for the economy and the Fed. The Fed, at this stage of the cycle, is more concerned with ensuring the economy lands safely at its long-run growth trend without dipping underneath it and falling into recession:
All of this economic data further supports the Fed's current rate cut schedule, which is unchanged on the day. Here's the current timing:
- 1x 25-bps rate cut by November
- 1x 25-bps rate cut by January
To repeat: Powell's foremost concern is no longer about price inflation. It has made clear and steady progress back down from its heights–and while it's still elevated at 3% YoY, it is stable, nonetheless. The Fed's foremost concern is now shifting toward maintaining the progress it has already made and eliminating the rising tail risk of an unwind in the labor market which threatens to undo it all.
The Fed's 25-bps rate cuts are small enough that they won't necessarily reaccelerate consumer spending and risk price inflation accelerating again, but large enough that the Fed is incrementally easing up on funding pressures that could throw a wrench into financial stability.
And last but not least, Biden is all but out of the race. His debate performance last night was one for the ages, and not in a good way. His polling odds dropped from 47% to 33% in 90 minutes from when the debate started to when it ended, clearly visible in the chart below.
A Trump victory would mean huge things for the U.S. stock market. No doubt this optimism about 45 becoming 47 will be another tailwind for equities and other risk assets, bitcoin included, throughout the rest of the year, into November, and into the January inauguration:
Final thought: have a blessed and relaxing weekend, everyone.
Take it easy,
Joe Consorti
Theya is the world's simplest Bitcoin self-custody solution. With our modular multi-sig vaults, you decide how to hold your keys.
Whether you want all your keys offline, shared custody with trusted contacts, or robust mobile vaults across multiple iPhones, it's Your Keys, Your Bitcoin.
Download Theya on the App Store.