US Consumer Spending Rises The Most in Five Months

Today’s report on US personal income and outlays adds to the mounting evidence of improving economic conditions in the US. Personal income rose 0.3% and consumer spending 0.4% – the largest rise in consumer spending during the last five months.

Investors were carefully eyeing this report and, with the look of the stock market this afternoon, they weren’t too happy. It may seem odd, but for many traders, this is another potential nail in the coffin for another round of quantitative easing. Consumer spending has been recovering lately and in general, all economic indicators have been registering a modest improvement with yesterdays GDP numbers coming at 1.7% (0.2% above the advance estimate). With economic indicators pointing to a continued recovery and with equities at the current elevated levels, it is becoming ever harder to justify another round of quantitative easing since the FED usually reserves “unconventional policy measures” to emergency situations and we are moving more decisively out of one.

Dow takes a tumble on the figures (arrows below)

The volatility index, VIX, is now trading above 17 and has been rising lately from a low of 13 set just over 4 weeks ago. This index, also known as the fear index, is pointing to a potential continuation in the retreat in equities.

Investors will be carefully monitoring any developments tomorrow when Ben Bernanke will be at Jackson Hole for an annual symposium. It is not likely he will say anything new but many believe, or have faith, he will. The FED will wait for the next non-farm payrolls report to be released Friday next week for clues on the risks and benefits of using another bond-buying program, and on September 13 will take a decision about it. For now, volatility is likely to pick up and traders should tread carefully – the going’s getting a little tougher.