Overview: Did consumers prefer savings over consumption in April?

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Overview: This week's economic releases—relook at the consumer (Part 4 of 11)

(Continued from Part 3)

U.S. Bureau of Economic Analysis: Personal income and outlays

The U.S. Bureau of Economic Analysis (or BEA) will release the Personal Income and Outlays report on Thursday, June 26. The Personal Income and Outlays report is one of the most important economic releases for fixed income (BND) investors. Besides providing data on the income and spending levels of individuals, the report also provides estimates for the Fed’s preferred inflation measure—the Change in Personal Consumption Expenditure (or PCE).

The Fed has an explicit long-term inflation target of 2%. The Fed seeks to achieve this by making appropriate adjustments to its monetary policy. In recent years, the PCE has trailed its 2% target on the back of slow demand and economic slack.

However, due to the economy finally gaining some momentum this year, year-over-year (or YoY) headline inflation came in at 1.6% in April—higher than the 1.1% reported in March. As inflation touches its long-term target, the Fed would look to a tighter monetary policy. Monetary tightening or an increase in the Fed funds rate is expected to come in between 2Q14–4Q14. Higher interest rates would impact bond markets for both Treasuries (TLT) and corporate bonds (HYG).

Inflation also increases the nominal yields on bonds which reduces their price. Borrowers benefit in this scenario because they end up paying less in current dollars, while creditors suffer. Stocks (SPY) are a better inflation hedge than bonds in a rising inflation environment as stock prices adjust more quickly to inflation.

Other key takeaways from April’s report

Although rising inflation was one of the positives of the report, consumer spending fell by 0.1% month-on-month (or MoM) in April, while personal income increased by 0.3%. Both numbers were disappointing, coming in below consensus. Consumer spending is one of the key components of gross domestic product (or GDP). It accounts for over two-thirds of GDP. As a result, it can significantly impact GDP growth and affect the entire economy.

An upturn or downturn in consumer spending can impact ETFs like the SPDR S&P Retail ETF (XRT), which includes holdings in retailers like Walgreens and Kroger.

In the next section, we’ll preview the Existing Home Sales report for the month of May, which will be released on Monday, June 23.

Continue to Part 5

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