PCE Inflation Cools in January

Short end of the yield curve drops below 4%. Inflation data contributed to a decline in yields today, with core YoY PCE close to its lowest level since March 2021. Yields dropped 3-6 bps, pushing the short end of the curve below 4% for the first time since October. Yields are currently 40-60 bps lower than YTD highs, with most of the move driven by rising concerns about the potential for a prolonged economic slowdown. Meanwhile, the NASDAQ and S&P 500 climbed ~1.6% today but still fell -3.5% and -0.98% on the week, respectively.

Inflation falls on a yearly basis. Today’s PCE inflation data showed that price growth slowed or was unchanged across most measures in January. While core PCE climbed from 0.2% to 0.3% on a monthly basis, the headline figure was unchanged at 0.3%. Year over year, headline and core inflation both fell, a welcome development amidst concerns that inflation progress may have stalled in recent months. Still, the data showed that inflation remains well above the Fed’s 2.0% target, and the still-uncertain impacts of President Trump’s tariff proposals remain a key inflationary risk in the months ahead.

Labor data to highlight the week ahead. Despite the significant slowdown in US hiring from December (307k jobs added) to January (143k jobs added), a 0.1% decline in the unemployment rate boosted optimism and reaffirmed the strength of the labor market. Next week’s data is expected to keep optimism high with 160k jobs added in February and an unchanged unemployment rate (4.0%). However, average hourly earnings are expected to slow to 0.3% MoM from 0.5% in January.