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FRIDAY DATA BARRAGE: PCE, CHICAGO PMI, TRADE BALANCE, INVENTORIES

Investors embarked on the last day of the week and month with a lot to digest: as-expected inflation data, a disappointing consumer spending number, spiking savings, an upside surprise from midwest factories, a yawning trade gap and beefed up inventories.

Starting with the star of the show, the Commerce Department's Personal Consumption Expenditures (PCE) USPCE=ECI price index, Powell & Co's preferred inflation yardstick.

On a monthly basis, headline and core (excluding food and energy prices) both increased by 0.3%, with the former repeating December's print and the latter heating up by 10 basis points.

Year-on-year, headline and core prices rose by 2.5% and 2.6%, respectively, both numbers amounting to a deceleration from the prior month's reading.

Right down the line, all of these numbers were in agreement with consensus estimates.

"PCE made progress in moving lower and towards the Fed's 2% target, albeit slow progress," writes Robert Ruggirello, chief investment officer at Brave Eagle Wealth Management. "While additional rate cuts are still probably many months away, we believe this report helps to keep one or two rate cuts on the table for 2025."

With this, core PCE appears within striking distance of the Fed's 2% inflation target:

Elsewhere in the report, personal income shot up by 0.9%, blasting past the 0.3% increase analysts expected.

At the same time, consumer spending unexpectedly decreased by 0.2%, defying the nominal 0.1% increase predicted by economists.

"Spending came in lower than we were looking for, and some of this may have been weather-related, but most of it I would attribute to a cooling economy," Peter Cardillo, chief market economist at Spartan Capital Securities tells Reuters.

"(This) presents a dilemma for the Fed in the sense that you still have inflation and you have an economy that is moving lower," Cardillo adds. "If you add them together, that equals stagflation."

Digging below those topline numbers, a significant 3% drop in spending on durable goods and an 0.8% decline in nondurables more the offset the 0.3% increase in outlays on services.

Disposable income growth accelerated, to 0.6% from 0.2%.

Crucially, the saving rate - or, the unspent share of disposable income - jumped to 4.6% from 3.5%. That's the highest saving rate since last June.

The rising saving rate often rises in tandem with consumer anxiety, a notion supported by recent survey data from the Conference Board and the University of Michigan.

In a separate report, midwest factory activity contracted at a slower-than-expected pace this month.

MNI Indicators' Chicago purchasing managers' index $(PMI.UK)$ USCPMI=ECI jumped 6 points to 45.5, nearly 5 points stronger than economist estimates.

A PMI reading below 50 indicates monthly contraction.

On Monday, the Institute for Supply Management is due to unveil its broader, nationwide PMI reading for February, which is seen hanging on to expansion by its fingernails at 50.6.

Finally, the indefatigable Commerce Department also released its advance take on the goods trade balance and wholesale inventories.

The gap between the value of goods imported to the U.S. and those exported abroad USGBAL=ECI widened by 25.6% in January to $153.26 billion, a record deficit.

Delving deeper, while exports increased by 2.0%, imports surged by an attention-getting 11.9%, possibly representing an effort to front-load shipments from abroad in anticipation of a barrage of tariffs from the new administration.

"Some will say that this is the result of companies accelerating purchases from abroad to beat the tariffs that are threatened," says Carl Weinberg, chief economist at High Frequency Economics. "Others will say that the import explosion is due to strong domestic demand pushing against maximum attainable output at full employment."

"Both arguments are probably right."

The value of goods stacked in the warehouses of U.S. wholesalers USAWIN=ECI rose by 0.7%, rebounding from December's 0.4% decrease.

The reversal bodes well for current-quarter GDP; just yesterday the Commerce Department showed private inventories detracted a full percentage point from the topline.

(Stephen Culp)

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