PCE: solid spending gains in September points to strong momentum in Q4 - Nomura

Analysts at Nomura explained that PCE inflation is expected to remain weak in the near-term.

Key Quotes:

"Personal income increased 0.4% m-o-m in September, matching expectations, with wages and salaries increasing 0.4%. Personal spending increased strongly by 1.0% mo-m (Nomura and Consensus: 0.9%), reflecting a strong rebound after last month’s 0.1% increase.

The increase in September was the strongest since 2009. The increases spending in September were broad-based across both goods (+2.1% mo-m) and services (+0.5% m-o-m). Much of the gain was concentrated on spending on autos and auto parts (+9.7% m-o-m) as hurricane damage lead to replacement vehicle purchases.

A sharp jump in gasoline prices lead to more nominal spending on gasoline and other energy goods (+10.5% m-o-m). Overall, spending growth appears to be healthy heading into Q4. Real personal spending rose 0.6% m-o-m in September, suggesting strong momentum. Further, we expect continued improvement in labor market conditions and a downtrend in unemployment. Growth in real PCE in Q3 was healthy at 2.4% q-o-q saar.

We expect solid growth to continue in Q4. On inflation, the core PCE price index rose by 0.1% (0.129%) m-o-m in September, broadly in line with expectations (Nomura: 0.141%, Consensus: 0.1%). Revisions to prior months were moderate. As a result, y-o-y core PCE inflation remained unchanged at 1.3% (1.328%).

Looking ahead, we expect core PCE inflation to remain at around 1.3% y-o-y in the coming months as the underlying pace of inflation will likely remain weak and residual seasonality could weigh down core inflation in November and December. It is uncertain how the delayed effect of the recent hurricanes will play out, but so far the impact on core inflation appears very limited.

The aggregate PCE deflator rose strongly by 0.4%, matching expectations, reflecting a sharp increase in energy prices. As for the implications to monetary policy, today's core PCE price data may not materially change the probability of a December rate hike.

As Chair Yellen mentioned in her recent speech, despite uncertainty around the inflation outlook, she and "many" other FOMC participants will likely maintain their view that, in the medium term, inflation will likely go back toward 2%, suggesting that they continue to view the recent weakness in inflation as transitory."