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Consumer spending slows, but inflation is rising

U.S. consumer spending barely rose in February amid delays in the payment of income tax refunds, but the biggest annual increase in inflation in nearly five years supported expectations of further interest rate hikes this year. The slowdown in consumer spending reported by the Commerce Department on Friday is, however, likely to be temporary with consumer confidence at a more than 16-year high and a tightening labor market pushing up wage growth."Given the weather-related weakness in utilities spending as well as some delays in tax refunds for low- and middle-income earners in February, we expect consumer spending to strengthen in the quarters ahead," said Eugenio Aleman, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, edged up 0.1 percent. That was the smallest gain since August and followed an unrevised 0.2 percent rise in January. Economists had expected a 0.2 percent increase. The government delayed the issuing of tax refunds this year as part of efforts to combat fraud. Spending last month was held back by a 0.1 percent dip in purchases of big-ticket items like automobiles. While unseasonably warm weather lowered households' heating bills, it restricted spending growth last month. Weak consumer spending resulted in the Atlanta Federal Reserve trimming its first-quarter economic growth estimate by one-tenth of a percentage point to a 0.9 percent annualized rate. Gross domestic product increased at a 2.1 percent rate in the fourth quarter, stepping down from the July-September quarter's brisk 3.5 percent pace.

Despite signs of moderate growth, economists expect the Federal Reserve will raise interest rates at least twice more this year. The U.S. central bank raised its benchmark overnight interest rates by a quarter of a percentage point this month. Other data on Friday showed the University of Michigan's consumer sentiment index slipping to a reading of 96.9 in March from 97.6 earlier in the month. The final reading was a touch higher than February's 96.3. A report from the Conference Board this week showed its consumer confidence index surging in March to its highest reading since December 2000. The dollar was trading slightly higher against a basket of currencies, while U.S. stocks fell marginally as investors skimmed profits off recent gains. Prices for U.S. government bonds rose modestly.

INFLATION PRESSURES BUILDINGEven with economic growth slowing at the start of the year, inflation is rising. The personal consumption expenditures (PCE) price index gained 0.1 percent last month after jumping 0.4 percent in January. That lifted the year-on-year rate of increase in the PCE price index to 2.1 percent, the biggest gain since April 2012. The PCE price index rose 1.9 percent in January. Excluding food and energy, the so-called core PCE price index increased 0.2 percent last month after rising 0.3 percent in January. In the 12 months through February, the core PCE price index increased 1.8 percent after a similar gain in January. The core PCE is the Federal Reserve's preferred inflation measure and is running below its 2 percent target. Inflation is now in the upper end of the range that Fed officials in March felt would be reached this year.

"There is nothing in this report that suggests the Fed should pause in June in its gradual renormalization of monetary policy but the Fed will look closely at the evolution of core inflation over the next two months in making that decision," said John Ryding, chief economist at RDQ Economics in New York. Rising price pressures are also eating into consumer spending. When adjusted for inflation, consumer spending fell 0.1 percent in February after declining 0.2 percent in January. That was the first back-to-back monthly decline in real consumer spending since April 2009. Personal income rose 0.4 percent last month after advancing 0.5 percent in January. Wages increased 0.5 percent, the biggest gain in five months. Income at the disposal of households after accounting for inflation increased 0.2 percent after dipping 0.1 percent in January. Savings rose to a five-month high of $808.0 billion from $770.9 billion in January. Rising incomes and higher savings bode well for future consumer spending.

Stocks baulk at G20s protectionism shift, dollar six week low

World stocks opened the week on a cautious footing on Monday after the G20's decision to drop a pledge to avoid trade protectionism, while the U.S. Federal Reserve's conservative rate guidance continued to push the dollar lower. Asian stocks were mixed, European stocks fell as much as 0.3 percent and U.S. futures pointed to a fall of around 0.2 percent at the open on Wall Street. The dollar fell to a six-week low, falling four days in a row for the first time since early November. "European equity markets have started the week with a heavy risk-off sentiment after the G20 communiqué explicitly reflected U.S. intentions to establish trade protectionist measures," said Ipek Ozkardeskaya, senior market analyst at London Capital Group."As the world's number one economy is preparing to set significant barriers against the world, investors are increasingly worried," she said. Financial leaders of the world's biggest economies dropped a pledge to keep global trade free and open, acquiescing to an increasingly protectionist United States after a two-day meeting failed to yield a compromise. Breaking a decade-long tradition of endorsing open trade, G20 finance ministers and central bankers made only a token reference to trade in their communique on Saturday, a clear defeat for host nation Germany, which fought the new U.S. government's attempts to water down past commitments. The FTSEuroFirst index of leading 300 European shares fell 0.3 percent to 1,487 points . FTEU3, and Germany's DAX . GDAXI and Britain's FTSE 100 . FTSE also fell 0.3 percent in early trade. MSCI's broadest index of Asia-Pacific shares outside Japan . MIAPJ0000PUS rose almost 0.4 percent to hit its highest level in more than two years on Monday. As a result, MSCI's global benchmark equity index was little changed . MIWD00000PUS.

On Friday, Wall Street was flat to negative, dragged lower by bank shares that fell along with Treasury yields. The 10-year U.S. Treasury yield has fallen around 10 basis points below 2.50 percent US10YT=RR since the Fed raised rates last week for only the third time in over a decade. The gap between two- and 10-year yields has shrunk, meaning the yield curve has flattened. This suggests investors are skeptical growth and inflation will be strong enough to warrant a sustained cycle of rate hikes, and has subsequently weighed on the dollar. After raising rates last week, the Fed reiterated plans for a total of three rate hikes this year, fewer than the four markets were expecting.

DOLLAR DOWN G20 financial officials reiterated their warnings against competitive devaluations and disorderly currency markets. The dollar didn't show much reaction, taking its cue instead from the moves in U.S. yields. Currency markets are also focused on a raft of speeches by Fed officials this week, including Chicago's Charles Evans on Tuesday and Friday, Chair Janet Yellen on Thursday, Dallas's Robert Kaplan and Minneapolis's Neel Kashkari on Friday and New York's William Dudley on Saturday."Sentiment towards the dollar has deteriorated significantly," Societe Generale FX analysts said in a note to clients on Monday. The dollar index of its value against a basket of six currencies fell to a six-week low of 100.02 on Monday.

It fell 0.2 percent against the yen before recovering to trade flat on the day at 112.70 yen JPY=D4, while the euro rose 0.3 percent to $1.0770 EUR=. Citi became the latest major bank to abandon its headline forecast for a fall in the euro to below parity with the dollar, upping its prediction for the single currency over the next six to 12 months to $1.04 from $0.98 previously. Attention now turns to the French election, with the first Presidential debate set to take place on Monday. Opinion polls show independent centrist Emmanuel Macron would lead far-right leader Marine Le Pen by a hair in first-round voting, before beating her in the run-off. In commodities, oil prices continued their downward trend as OPEC supplies remained steady despite touted cuts and rising U.S. drilling contributed to concerns about a supply glut. U.S. crude CLc1 dropped 1 percent to $48.29 a barrel. Global benchmark Brent LCOc1 fell 0.7 percent to $51.40. The weaker dollar boosted gold XAU=, which rose 0.4 percent at $1,233 an ounce, after touching a two-week high earlier in the session.