Highlights
The July personal income report showed a drop off in income tax rebates pulling down overall income. Meanwhile, inflation is outstripping moderate gains in spending. Personal income in July fell 0.7 percent, following a 0.1 percent rise in June. The July number came in far worse than the consensus forecast for a 0.1 percent decline. Within personal income, the wages and salaries component posted a moderate 0.3 percent gain, following a 0.2 percent rise in June.

Spending was moderated by a sharp dip in motor vehicle purchases. Personal consumption expenditures in July slowed to a 0.2 percent rise, after jumping 0.6 percent in June. The market had projected an increase of 0.2 percent for personal spending. Strength was in a 0.5 percent boost in services, followed by a 0.3 percent rise in nondurables. Durables fell 1.5 percent.

Turning to inflation, the headline PCE price index remained quite hot with a 0.6 percent jump - only slightly down from June's red hot 0.7 percent surge. The core PCE price index held steady but at a pace unacceptable to the Fed, rising 0.3 percent in both July and June. The latest number matched consensus expectations.

Year on year, personal income growth fell to up 4.2 percent from up 5.5 percent in June. Headline PCE inflation jumped to up 4.5 percent from up 4.0 percent the month before. Core PCE inflation rose to 2.4 percent from 2.3 percent in June.

Today's report shows the consumer sector on increasingly shaky ground as inflation is eating away at income and spending even as rebate checks have fallen off. Real spending actually fell 0.4 percent in July, after dipping 0.1 percent in June. The July numbers take a lot of luster off yesterday's upward revision to GDP. While the news should be a negative for equities, it is unclear about the impact on bonds. The high inflation numbers are likely to have the larger impact, firming yields, but the weaker income and real spending data could send rates down.