Strong Data Ahead of Tomorrow’s PCE

Rates surge higher on hot data. Swap rates and Treasury yields rose across the curve today, with morning data the catalyst. Stronger-than-expected GDP and personal consumption data, combined with misses in jobless claims data, showed economic strength that could pave the way for additional rate hikes. Futures are now pricing in over 1.37 25bp hikes by the end of the November FOMC meeting, a steep climb from yesterday’s close (1.17). The 2-year UST yield rose 15bps to 4.86%, a reflection of this same sentiment.

Another round of strong economic data plays into hawkish Fed narrative. On the heels of yesterday’s announcement by central bankers that rate hikes will continue to be needed to stem inflation, today’s data releases showed expectation-busting US economic growth, consumer spending, and the biggest drop in jobless claims since 2021. Quarterly PCE, released the day prior to monthly and yearly PCE, came in slightly under expectations but indicated high and persistent inflation. Previewing tomorrow’s data, some analysts expect softer headline results than April, with sharp declines in YoY and MoM inflation. Consistent with recent Fed messaging, however, that core inflation remains hot, markets expect those figures to be in-line with last month’s. Regardless of tomorrow’s results, Chair Powell has been committed to further hikes in recent weeks, and a core miss may not be enough to dissuade the Fed from two additional hikes in 2023.   

Day ahead. PCE, personal income, and personal spending will lead the session at 8:30 AM. Chicago PMI and Michigan consumer sentiment will follow shortly thereafter.