PCE Inflation Ticks Higher as Rates Decline

Rates steepen on PCE day. Today’s price action was mixed after PCE’s release, which revealed flat headline MoM inflation (0.4%) and an increase in core MoM inflation (0.3%). The 2y yield hovered around and closed at 5%, a 12 bp fall from the week’s high close of 5.12%. Markets will look ahead to next week’s FOMC decision and commentary for signals on the path forward. Futures markets continue to price in nearly no chance of a Fed rate hike.

Core PCE jumps most in 4 months. PCE measures were largely in-line with analysts’ expectations for September. Core PCE, the Fed’s preferred measure, hit a 4-month high of 0.3%. Consumer spending, on the other hand, was higher than expected and 0.3% higher than last month’s figure, driven by higher auto, prescription medicine and travel expenses, among others. Together, today’s data paint a picture of strong and persistent U.S. economic growth, specifically in the service sector where prices increased 0.5%, the most since January.

A busy week ahead for the Fed. Next week’s FOMC decision will headline after a chaotic month since September’s pause. Data has generally illustrated sticky inflation (specifically CPI and PPI), the labor market has remained robust, and the Middle East conflict has caused concern for oil prices and continued inflationary pressures. Despite these factors, fed funds futures see a rate cut as the more likely decision over a hike, though the chance of either is nearly nil. Next week’s slate will also feature nonfarm payrolls and unemployment rate data, where the former is expected to drop significantly and the latter to remain flat at 3.8%.