The primary Federal Reserve inflation gauge came in too hot for near-term rate cuts in March, but not as bad as feared. The S&P 500 rose strongly Friday, expanding on overnight gains following earnings news from Google parent Alphabet and Microsoft.
Primary Fed Inflation Rate
The personal consumption expenditures, or PCE, price index rose 0.3% in March. The 12-month headline inflation rate picked up to 2.7% vs. 2.6% forecasts.
Markets were bracing for a hot reading after Thursday's GDP report showed core prices rose at a 3.7% annual rate in Q1.
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 0.3% in March, not as bad as feared following the quarterly data.
Markets feared that the core 12-month inflation rate would rise for the first time since late 2022, but that didn't happen, as core inflation held at 2.8%.
On an unrounded basis, the 12-month core PCE inflation rate dipped to 2.82% from 2.84% in February and 2.93% in January.
Over the past six months, though, core PCE inflation has been running at a 3% annual rate, unchanged from February. The 3-month annualized rate jumped to 4.4% from 3.7% in February and 3% in January.
One reason that March data wasn't as bad as feared: The hot quarterly data partly reflected an upward revision prior data. In January, core PCE prices rose 0.5%, up from 0.45% previously.
While not great, as long as inflation moderates from here, the Fed may be assuaged that January's outsized gain was a one-time catch-up, based on past wage and cost growth, as companies update prices to start the year.
Supercore Services Inflation
Still, below the surface, the March inflation data did confirm that the coast is far from clear. Look at what Wall Street now calls supercore inflation, a measure unveiled by Federal Reserve chair Jerome Powell in late 2022 that measures changes in core service prices excluding housing. This narrower view of price changes was in keeping with the Fed's worry that the tight labor market and elevated wage growth had been at the root of stubbornly high inflation. Wages make up a high percentage of costs for service businesses. Therefore, supercore services inflation should ease as wage pressures moderate.
Yet prices for these core nonhousing services, including health care, haircuts and hospitality, rose 0.4% on the month, after a more moderate 0.15% increase in February. In January, nonhousing core service prices surged 0.75%.
The 12-month supercore services inflation rate has picked up to 3.5% from 3.3% at the end of 2023.
Personal Income, Spending
The PCE price index is released with the Commerce Department's monthly personal income and outlays report. Personal income rose 0.5%, matching forecasts. Personal consumption expenditures rose 0.8% in March vs. 0.6% forecasts. That followed a solid 0.8% rise in February.
Federal Reserve Rate Cut Odds
After the March PCE report, market pricing showed 29% odds that the first rate cut will come by the July 31 meeting, down from 30% ahead of the data. Markets now see 57% odds the first cut will happen by Sept. 18, down from 59%.
Markets see 59% odds of no more than one quarter-point rate cut for the full year. There's a 19% chance that the Fed will leave rates steady.
S&P 500
The S&P 500 rose 1% in Friday stock market action, holdings and expanding on early tech-driven gains on Microsoft and Google. The S&P 500 lost 0.5% on Thursday on the alarming inflation data, but came well off its lows. The S&P 500, after diving below its 50-day moving average on April 15, is working to regain that key technical level.
The 10-year Treasury yield backed off to 4.67% from 4.71% on Thursday.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
