The primary Federal Reserve inflation gauge came in higher than expected in June. Following the data, the S&P 500 rebounded after three straight down sessions as investors weighed the implications for next week's Fed meeting and the rate-cut outlook.
Primary Fed Inflation Rate
The personal consumption expenditures, or PCE, price index rose 0.1%, in line with Econoday's consensus forecast. The 12-month headline inflation rate eased to 2.5%, matching estimates.
Typically, Federal Reserve decision-making puts more weight on core inflation, which strips out volatile food and energy prices. The core PCE price index rose 0.2% in June, above 0.1% forecasts. The 12-month core inflation rate remained stuck at 2.6%, exceeding 2.5% forecasts.
On an unrounded basis, the core PCE price index rose 0.18%. The 12-month core inflation rate edged up to 2.63% from an initially reported 2.57% in May, which was revised up to 2.62% in Friday's report.
May's initially reported 0.08% rise in the core PCE price index was revised up to 0.13%.
June inflation forecasts were submitted ahead of Thursday data showing that the Fed's key gauge of core inflation ran a touch hotter than expected in the second quarter, at 2.9% vs. 2.7% expectations, though down from 3.7% in Q1. Meanwhile, the economy also gained momentum, as GDP growth picked up to 2.8% from the prior quarter's 1.4%.
Below the surface, the Q2 inflation data looked somewhat better. A measure of core market-based inflation eased to 2.4% last quarter. That market-based measure excludes categories in which price changes are imputed, rather than calculated based on transactions. Portfolio management services prices, which are imputed and tend to follow the S&P 500, rose at an 18% annualized rate in Q2.
Personal Income, Spending
The PCE price index is released with the Commerce Department's monthly personal income and outlays report. Personal income rose 0.2%, below 0.4% forecasts. Personal consumption expenditures climbed 0.3% in June, meeting estimates.
Federal Reserve Rate-Cut Outlook
After June's core PCE inflation data, market pricing showed 5% odds that the first Fed rate cut will come at next week's meeting, but 100% odds of a quarter-point rate cut being announced no later than the next meeting on Sept. 18. Markets see slim 12% odds of 50 basis points in rate cuts by Sept. 18.
Over the rest of 2024, markets see 98% odds of at least 50 basis points worth of Fed rate cuts and 64% odds of three quarter-point cuts.
In recent weeks, Federal Reserve Chairman Jerome Powell has sounded dovish, saying the disinflationary trend has resumed and that the labor market is in balance and not a significant inflationary threat. Friday's inflation data doesn't really change that picture. Nomura economists have said that the Fed is unlikely to cut more than 25 basis points per quarter unless the labor market softens further.
S&P 500 Rebounds
The S&P 500 climbed 1.5% in Friday stock market action following the PCE inflation data. On Thursday, the S&P 500 lost 0.5%, bringing its three-day decline to 3%, the sharpest since last October. After Friday's rally, the S&P 500 sits 3.7% below its July 16 all-time closing high.
The 10-year Treasury yield fell six basis points to 4.2%.
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