Consumer spending rose solidly in December at a healthy pace by 0.4% m/m while personal income gained 0.4% and wages improved 0.5%. Meanwhile, the core PCE, which is the Fed’s preferred gauge, climbed 1.7% y/y in December, bringing the full-year average to 1.5%, missing the Fed’s 2.0% target since mid-2012. However, the saving rate dropped to a 10-year low of 2.4%. Despite the core PCE having undershoot the Fed’s 2% target for nearly 5½ years, we expect the Fed to raise rates three times in 2018. The first rate hike is likely to be executed in March by 25bps. In the coming FOMC meeting, we expect the Fed, with its new Fed Chair Jerome Powell taking over from Janet Yellen in February, to paint a slightly hawkish tone to prepare for March rate hike.

• Consumer spending rose solidly in December as demand for goods and services increased. It rose by 0.4% m/m in December from 0.8% m/m in November. Personal income gained 0.4% in December from 0.3% in November. Wages increased 0.5% in December versus 0.4% in November.

• Strong consumer spending helped to offset the drag from trade and inventories, thus allowing the economy to grow 2.6% in 4Q2017 from 3.2% in 3Q2017.

• Inflation in December rose. The Fed’s preferred inflation gauge i.e. personal consumption expenditures (PCE) price index excluding food and energy rose 0.2% m/m in December from 0.1% m/m in November. On an annual basis, the PCE climbed modestly by 1.7% y/y from 1.8% y/y in November. For the full year of 2017, the core PCE gained 1.5%, missing the Fed's 2% target again since mid-2012.

• Meanwhile, the increase in consumer spending came at the expense of savings, which dropped to a 10-year low of 2.4%, the lowest level since September 2005 from 2.5% in November. The low savings can act as a red flag for both consumer spending and economic growth.

• Despite the core PCE having undershoot the Fed’s 2% target for nearly 5½ years, we expect the Fed to raise rates three times in 2018. The first rate hike is likely to be executed in March by 25bps. In the coming FOMC meeting, we expect the Fed, with its new Fed Chair Jerome Powell taking over from Janet Yellen in February, to paint a slightly hawkish tone to prepare for March rate hike.

Source: AmInvest Research - 30 Jan 2018