ING Research has reacted to today's robust US personal income and spending report for April, noting that it could potentially lead to another Federal Reserve rate hike in either the June or July meetings. The report showed incomes rose by 0.4% month-on-month as expected, with wages and salaries increasing by 0.5%MoM. However, spending rose by 0.8%MoM, outperforming the 0.5% consensus, with March revised higher.
This surge in spending led to real consumer spending coming in at 0.5%MoM, beating the expected 0.3%. Given that consumer spending constitutes two-thirds of economic activity as measured by GDP, this is likely to prompt upward revisions of second-quarter GDP expectations.
On the inflation front, the core PCE deflator came in at 0.4%/4.7%, higher than the anticipated 0.3%/4.6%. This increase bolsters the argument of Fed hawks such as James Bullard and Neel Kashkari who advocate for tighter policy to ensure inflation returns to the 2% target in a timely manner. ING still anticipates a sharp slowdown in inflation in the second half of the year, but they are increasingly doubtful that the Fed will resist hiking rates, especially if spending continues to hold up.
ING added that if the debt ceiling issue is positively resolved and next Friday's jobs number comes in around 200k, the chances of a 25bp hike in June will increase.