Annualized Core PCE at Highest Level Since February

Yield curve steepens following PCE, consumer sentiment data. Today’s inflation print fueled a UST sell-off after core YoY PCE hit its highest level since February. However, policy-sensitive yields declined after UMich consumer sentiment and inflation expectations data were lower than expected. The 2-year yield closed 1bp lower at 3.62%, a 10 bp decline on the week. Meanwhile, longer-term yields were largely unaffected by the consumer sentiment and inflation expectations data; 10-year (4.23%) and 30-year (4.93%) yields closed 3 and 5 bps higher, respectively. Markets are now looking ahead to next Friday’s nonfarm payrolls print, which is expected to show 75k US jobs added in August.

Consumer spending resilient despite elevated inflation. July PCE was in line with expectations across all readings, keeping a September rate cut likely as the US avoided a significant inflationary blowout. However, core YoY PCE (2.9%) and core MoM services inflation (0.39%) reached their highest levels since February, where the services pickup was mainly driven by a rise in financial and recreational costs. Furthermore, increased non-durable goods prices, which includes items sensitive to tariffs, offset slightly lower durable goods prices. On a positive note, consumer spending grew by 0.5% in July, the highest rate of growth in four months, despite elevated inflationary pressures.

Michigan sentiment hits three-month low. Final University of Michigan consumer sentiment data for August was released today, with the headline index landing at 58.2, slightly lower than the prior estimate of 58.6 and last month’s 61.7 print. The lower reading was largely driven by a combination of worsening employment and inflation outlooks. 63% of consumers expect higher unemployment next year, and their 1-year ahead inflation expectations rose to 4.8%, from 4.5% in July. Looking further ahead, however, 5–10-year consumer inflation expectations fell to 3.5%, from 3.9% last month. Still, the data reflected persistent uncertainty about the future, highlighted by a decline in the future expectations index from 57.7 last month, to 55.9. The data also illustrated an unprecedented division in outlooks along political-party lines, with the sentiment index for Republicans landing at 96.3 vs. Democrats’ 38.8.