The strong consumer spending which grew 0.4% in April, the fastest pace in 2017, the rebounding of inflation to 0.2% in April and solid gain in personal income (up 0.4%) in April indicate that the economy is heading towards a more positive footing, leaving behind a soft start in 1Q2017. These also suggest the economy has shrugged off the political turmoil and is back on a firmer footing to lead the global recovery. With such data, we now expect the 2Q2017 GDP to be around 3% with 1Q2017 at 1.2%, thus likely bringing 1H2017 growth to around 2%.

Although the Fed’s May minutes of the policy meeting indicates that policymakers agreed that it should hold off raising rates until there is growing evidence the growth slowdown is transitory, we feel the latest data has opened the door wider for the Fed to raise interest rates in June by 25bps. We have raised our probability for a rate hike in June to 85% from 80% previously.

• Consumer spending, which accounts for more than two-thirds of the economic activity, rose 0.4% in April which is the largest gain since December 2016 and from 0.3% in March. Optimism in consumer spending suggests that households are still confident on the overall economic performance despite some brief hiccup and strong increase in house prices, reflected by the higher spending on both goods and services.

• Meanwhile, we noticed the Conference Board, which measures the consumer confidence index, eased to 117.9 in May from 119.4 in April. However, we feel the index, which reached a 16-year high of 124.9 in March, is still being influenced positively by the strengthening labour market.

• The personal consumption expenditures (PCE) price index rebounded 0.2% in April, reversing March's 0.2% drop. On a y/y basis, the PCE in April rose 1.7% following a gain of 1.9% in March. Excluding food and energy, the so-called core PCE price index also bounced back 0.2% after falling by 0.1% in March. Y/y, it rose 1.5% from 1.6% in March. The core PCE, which is the Fed's preferred inflation measure, has a 2% target.

• Personal income edged up 0.4% in April after gaining 0.2% in March. Income at the disposal of households after accounting for inflation advanced 0.2%. Savings were little changed at US$759.1 billion in April.

Rate hike seems certain in June

• From the Fed’s May minutes of the policy meeting, policymakers agreed that the Fed should hold off raising rates until there is growing evidence the growth slowdown is transitory.

• However, we feel the latest data i.e. strong consumer spending with the biggest gain in four months in April and the rebounding inflation indicate that the economy is exhibiting a firmer domestic demand. The 2Q2017 GDP growth could be heading to around 3%.

• Hence, it has opened the door wider for the Fed to raise interest rates in June by 25bps. We have raised our probability for a rate hike in June to 85% from 80% previously

Source: AmInvest Research - 31 May 2017