Creating a new high in three years! The US May PCE rose by 4.1% year-on-year in line with expectations, and the Fed's rate hike expectations cooled off.

Despite the fastest rise in prices in over three years, US consumer spending accelerated in May, indicating that Americans are overcoming the impact of the Iran conflict. Data released by the US Commerce Department's Bureau of Economic Analysis on Thursday showed that the Personal Consumption Expenditure (PCE) price index rose by 4.1% year-on-year in May, the largest increase since April 2023, in line with market expectations. The core PCE price index, which excludes food and energy prices, also rose by 3.4% year-on-year, in line with market expectations. After adjusting for inflation, real personal consumption expenditure in the US increased by 0.3% in May, after stalling in April. Another report showed that the US economy grew by 2.1% year-on-year in the first quarter, higher than market expectations. Despite the increased inflation in May, consumer spending remains strong. These inflation data may continue to put pressure on the Federal Reserve to raise interest rates this year. Although recent peace talks between the US and Iran have led to a sharp drop in oil prices, economists expect that as the initial energy shock gradually permeates the supply chain, the costs of a range of products will continue to rise. Looking ahead, the recent drop in gasoline prices may provide some relief for US consumers, although the average price at gas stations is still nearly $1/gallon higher than before the war. Given the significant drop in oil prices, "inflation is likely to peak in May," according to Joe Brusuelas, Chief Economist at RSM US. However, due to ongoing price pressures, potential inflation "will not recede easily." The resilience of the US labor market and rising stock market may also support consumer spending, but workers across industries are finding that wage growth is not keeping up with inflation, leading many to reduce savings or turn to credit cards to maintain consumption habits. Data released on Thursday showed that personal income in the US rose by 0.7% month-on-month in May, with wages and salaries increasing by 0.4%. Disposable income, adjusted for inflation, increased by 0.3%, the first increase this year. The savings rate remained at 3%, the lowest level since 2022. Retailers like Kroger have reported that as rising oil prices squeeze household budgets, consumers are opting for discounted products. Meanwhile, Lowe's says customers are delaying purchases of big-ticket items. Lowe's CEO Marvin Ellison stated this month, "Consumers are in good shape overall, but the macroeconomic situation is making them a bit cautious." Another report released on Thursday showed a decrease of 12,000 initial jobless claims last week to 215,000, indicating the resilience of the labor market. Another report showed a 4.5% decline in durable goods orders in May, the largest drop in nearly a year. Following the release of the economic data, the two-year US Treasury bond yield, which is most sensitive to changes in Fed policy, fell by 4 basis points to 4.10%. The benchmark 10-year US Treasury bond yield also fell by 3 basis points to 4.36%. Interest rate swaps indicate that traders have reduced their bets on a Fed rate hike this year, with pricing now indicating an increase of around 33 basis points by December, compared to around 36 basis points at Wednesday's close. Pricing also reflects a further reduction in the likelihood of a rate hike by Fed officials at the July meeting.