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Making Sense: The Song Remains The Same

June Personal Income printed flat (0.0%) following a downwardly-revised May figure of 0.3% (down from 0.4%. June Personal Spending rose 0.1%, up from a prior revised 0.2% (up from 0.1%). Real Personal Spending flat-lined (0.0%) following an upwardly-revised 0.2% (up from 0.1%. Headline Annual PCE fell to 1.4% from an upwardly revised 1.5% (up from 1.4%). The Street had expected a decline to 1.3%. Core PCE YoY (the Fed’s favored measure of inflation and to what it refers when it discusses its 2.0% inflation target) printed at 1.5%, in June. This was unchanged from an upwardly-revised 1.5% print, in May.
The PCE data, while not troubling, per se, do not indicate that the U.S. economy is shifting into a higher gear. Approximately 70% of the U.S. economy is fueled by consumer spending. However, the PCE data (a Real Personal Spending print of 0.0%) indicate that, other than because of higher prices, consumer spending flat-lined. This appears to indicate that the U.S. economy ended the second-quarter on a soft note.  
 
I would also remind readers that the PCE includes much upward inflation pressure from a weaker USD.
 

The DXY USD Index, YTD (Bloomberg):

 
 
The data indicate that about 75% of the decline of the USD versus major foreign currencies, experienced this year, occurred by the end of June. Still, Core PCE (ex-food and energy prices) printed at only 1.5%, for both May and June. Thus, the pickup in inflation, which many economists are expecting in the second-half of 2017, may only be a few tenths, if that.
 
The July final readings Markit Manufacturing PMI printed at 53.3. This was slightly better than the Street consensus of 53.2 and marginally better than the prior July print of 53.2. It was also up from a June print of 52.0. ISM Manufacturing PMI printed at 56.3, down from a prior 57.8 and slightly below the Street consensus estimate of 56.4. Prints over 50 for both Markit and ISM PMI indicate expansion. 
 
ISM Prices Paid printed at 62.0, up from a prior 55.0 and higher than the Street consensus estimate of 55.8. ISM New Orders printed at 60.4, down from a prior 63.5. July ISM Employment printed at 55.2, down from 57.2. Prints over 50 are considered positive data. 
 
June Construction Spending MoM printed at -1.3%, down from, a prior revised 0.3% (up from 0.0%) and below the Street consensus of 0.4%.
 
The ISM data point to a slowing, but not a reversal, of the U.S. economic expansion, entering the third-quarter of 2017. However, the Markit data showed a slight improvement from the June data. As I have pointed out, in prior reports: Markit ISM data tend to be less volatile than the ISM data, but the two track closely, over the long term. I would point out that the ISM print of 53.3 was the best since the 53.3 print, in March of this year. In fact, Q1 Markit Manufacturing data (55.0, 54.2 and 53.3, respectively) were better than the Q2 data (52.8, 52.7 and 52.0, respectively). I find it interesting that the first month of the past two quarters proved to be the strongest month of their respective quarters. 
The economic data seems to run contrary to the strong earnings numbers seen for Q2 2017. Remember, when measured on an annual basis (vs. the same period in 2016), Q2 corporate earnings, revenues, etc. have an easy benchmark to beat. This is because Q2 2016 was the last quarter of the so-called earnings recession. Q3 comps will be more difficult to beat. It has become fashionable to claim that the UST market is underpricing the threat of inflation. I disagree. Other than a modest pickup inflation, I don’t believe much has changed in Q3, on the economic front. The Street consensus forecast for Q3 U.S. GDP stands at 2.5%, according to the Bloomberg Survey. This is notable because, since the Financial Crisis, Q2 and Q3 have usually exhibited the strongest GDP prints of the year. It appears as if 2017 will be another year of 2.0% GDP and sub-2.0% inflation. 
 
Bulls point to surging small business and consumer confidence as justification optimism, but much of this is hopium. I believe, as is usually the case, the bond market has it right. Following this morning’s data, the 10-year UST yield stood at 2.264% and the 2-year to 10-year curve was sloped by 92 basis points, at the time of this writing. This would appear to be consistent with a bond market outlook for moderate growth and moderate inflation. Please tell me what the Bond Market has wrong.

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About Thomas Byrne
Thomas Byrne has achieved a 26-year career in financial services, 23 of which have been spent in the fixed income market sector. In his role as Director of Fixed Income for Wealth Strategies & Management LLC., Byrne is responsible for providing strategic analysis and portfolio management to private clients and institutions, in addition to offering strategic advisory services to other financial services organizations. Byrne's areas of expertise include trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt, and convertible bonds. Additionally, Byrne provides analysis, strategy, and commentary within the fixed income market. Prior to joining WS&M, Byrne worked as Director in the Taxable Fixed Income Department of Citigroup, Inc., in addition to predecessor companies in New York, NY.
Twitter: @Bond_Squad
E-mail: Thomas.byrne@wsandm.com

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Thomas Byrne

Thomas Byrne serves ad the Director of Fixed Income for Wealth Strategies Management LLC. Thomas brings 26 years of financial services experience to Wealth Strategies & Management LLC. He spent the last 23 years as Director of Taxable Fixed Income for Citigroup, Inc. and predecessor firms in New York, NY. During the course of his long fixed income career, Mr. Byrne was responsible for trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt and convertible bonds. Mr. Byrne was also responsible for marketing, sales, strategy and market commentary within the taxable fixed income markets. High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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