PCE and Earnings Spark Risk-off Session

Economic data and weak earnings fuel UST rally. Today’s substantial PCE decline and GDP jump supported the “soft landing” narrative, sending swap rates and UST yields ~10bps lower across the curve. The data was especially positive after recent CPI and PPI illustrated everlasting inflationary pressures, and markets will hope that tomorrow’s PCE provides further evidence of deceleration. Elsewhere, weak earnings from Meta Platforms, Nvidia, and Microsoft forced a broad equity decline, the NASDAQ down 1.76% and the S&P500 down 1.18%.

QoQ PCE slowest since late 2020. Core QoQ PCE came in at 2.4% today, a significant slowdown from Q2’s 3.7% and slightly under the estimate of 2.5%. The slowdown could allow the Fed to keep rates at current levels without hiking incrementally; odds for a hike by the end of December’s FOMC meeting fell from ~26% yesterday to ~19% by today’s close. Meanwhile, tomorrow’s MoM and YoY PCE are expected to produce mixed results; core MoM is expected to rise 0.2% to 0.3%, while core YoY should fall 0.2% to 3.7%.

GDP illustrates economic strength. The US economy grew at 4.9% QoQ in the third quarter, the fastest pace in almost 2 years and over 2x the pace in the second quarter. Personal consumption, a main driver of GDP, also grew at the fastest pace since 2021. The figure came after 2 consecutive months of underperformance compared to forecasts, a welcome sign as markets look for evidence of a robust economy.