PCE Miss, Downward Revision Forces Rates Lower

Swap rates, Treasury yields fall after PCE, Fed commentary. Treasury yields fell late in the session after staying near neutral throughout the morning, with the 2-year yield falling 9bps to 4.03% while the 10-year yield fell 8bps to 3.47%. A miss in PCE and personal spending largely contributed to the Treasury rally, which was exacerbated by Fed voter John Williams’ comments that “stresses in parts of the banking system are likely to result in a tightening of credit conditions that will in turn reduce spending by businesses and households.” Equities rallied on the sentiment, with the S&P 500 rising 1.44% while the NASDAQ Composite climbed 1.74%.

Month-over-month PCE comes in below expectations for February. Core PCE prices in the U.S. rose 0.3% MoM in February, which was lower than the forecast of 0.4% and follows a downwardly revised level of 0.5% in January. The annual figure (+4.6%) also came in below expectations (+4.7%). A weak personal spending level offered further evidence that inflationary pressures may be slowing, though a personal income beat offset some of the sentiment. Futures currently imply a 58% chance of a 25bp hike at the May FOMC meeting, with no further hikes priced in thereafter.

Week ahead. The schedule will be highlighted by nonfarm payrolls and unemployment data on Friday, with nonfarm payrolls expected to come in ~71k lower than last month’s level of 311k. Manufacturing and non-manufacturing PMI, JOLTs job openings, and balance of trade data will be released earlier in the week. The week will round out with an early close on Friday in observance of Good Friday.