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All About That (Low) Base (Effect)

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Friday, June 25, 2021

Market futures are climbing on this last trading day of the week — the best for market participants in quite some time. Inflation is here, but the Fed is on it. Infrastructure is on the way (…at least for now). And the economy has yet to reach peak 2021 growth. The Dow is +145 points at this hour, the S&P is +10 and the Nasdaq +30.

The big economic data to hit the tape this morning is the all-important core Personal Consumption Expenditures (PCE), which the Fed tracks closely as a gauge on overall inflation, as well as Personal Income and Consumer Spending, both for May. As we know from the Fed’s statements this week and last, we are driving the economy through a downpour of inflation at present, which the Fed continues to believe will clear up in the foreseeable future.

Core PCE came in at +0.5%, a tick or two below expectations, as well as the +0.7% reported in April. Year over year, this expands to +3.4% — exactly as expected, and the highest monthly print in more than 20 years. With the Fed’s inflation target of +2.0% now having been breached, with no real policy changes on the immediate calendar, the bet is that things will cool off before running out of control.

Personal Income fell, as expected, but by a less-than-anticipated -2.0% from the -2.7% estimate. This follows a -13.1% drop from the previous month, which reflected the drop-off from March’s stimulus checks. Consumer Spending came in unchanged — well off the expected pace of +0.4%, and the upwardly revised +0.9% reported in April. The deflator was actually down -0.4% month over month, from -0.1% in the previous read.

On the one hand, we see consumers a bit more hesitant to rush into the Great Reopening these days: while summer vacations are now a must-have after 16 months being cooped up, airfares have gone skyward, as have gasoline prices. Is that extraordinary trip going to cover all the increased costs we’re seeing? Or maybe we should lower our near-term expectations, wait til things cool down and take that big vacation next year?

The other thing worth paying attention to is: these year-over-year comps defy all convention. The year 2020 is not one that has much value to compare against — EVERYTHING was devastated a year ago. So we must constantly refer to the “base effect” in terms of economic growth, for now as well as the coming months. In fact, one might say, it’s “All About That (Low) Base (Effect).” Er, sorry. Happy Friday!

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