The Federal Reserve's primary inflation rate showed that core price pressures cooled further in October as consumer spending moderated. The S&P 500 rallied late in Thursday's session to close modestly higher as the Dow Jones Industrial Average surged to its highest level in 2023.
The October inflation and spending data follows Wednesday's report that the U.S. economy grew at an upwardly revised, red-hot 5.2% annualized rate last quarter. Yet Fed Gov. Christopher Waller, a fixture of the higher-for-longer rate consensus, on Tuesday signaled that policymakers are ready for a quick pivot to rate cuts as growth slows and inflation continues to recede.
Wednesday's anecdotal Beige Book report on economic conditions in Fed districts across the country showed that activity was flat or lower in eight districts, while four districts reported modest growth. That would seem to highlight the potential for recession, if the Fed keeps policy too tight.
Core PCE Inflation Rate
The personal consumption expenditures, or PCE, price index was unchanged in October, while the annual inflation rate fell to 3% from 3.4% in September, cooler than 3.1% forecasts.
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 October, as expected.
The core 12-month inflation rate eased to 3.5% from 3.7% in September, matching Wall Street expectations.
Federal Reserve chair Jerome Powell has said policymakers want to see six months of tame inflation data to be sure that the disinflationary trend isn't fleeting. On a six-month basis, both PCE inflation and core PCE inflation are running at 2.5%.
Personal Income, Spending, Initial Claims
Personal income rose 0.2% on the month, while personal consumption expenditures rose 0.2% in October. Both measures matched economist forecasts of a modest gain.
Initial claims for unemployment benefits rose 7,000 to 218,000 in the week through Nov. 25, on a seasonally adjusted basis in the holiday-shortened week.
Federal Reserve Rate Cut Odds
After the PCE inflation report, markets were pricing in just 4% odds of a quarter-point Fed rate hike on Dec. 13 or on Jan. 31. Odds of a rate cut by the March 20 Fed meeting stood at 47%, up from just 27% a week ago. By May 31, markets see 76% odds of a rate cut.
S&P 500, Treasury Yield Reaction
The S&P 500 slipped below the flat line after the inflation data but finished up 0.4% in Thursday stock market action. The Dow Jones Industrial Average rose 1.5%, with an assist from IBD Stock Of The Day UnitedHealth Group. Meanwhile, the 10-year Treasury yield rose 8 basis points to 4.35%.
Still, Treasury yields are still down sharply for the week after plunging in recent days. Investors may not want to go out on a limb ahead of an appearance by Fed chair Jerome Powell at Atlanta's Spellman College on Friday at 11 a.m. ET.
At the start of November, Powell said that a tightening of financial conditions via a higher 10-year Treasury yield and lower stock prices might help policymakers avoid another rate hike — if that tightening persisted.
Yet even though the 10-year Treasury yield has since tumbled, and the S&P 500 has rallied sharply, the Fed isn't complaining — at least yet.
In a Thursday morning speech, New York Fed President John Williams said monetary policy is the most restrictive it has been over the past 25 years. By that he means that the Fed's key rate is at its highest point relative to a neutral policy rate that neither supports nor detracts from growth.
Be sure to read IBD's daily afternoon The Big Picture column to stay in sync with the market's underlying trend and what it means for your trading decisions.
Supercore Inflation
Starting late last year, Federal Reserve chair Powell shifted the inflation focus to core PCE services excluding housing, or supercore services. That was in keeping with the Fed's view 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.
Prices for these core nonhousing services, including health care, haircuts and hospitality, rose just 0.15% in October and 3.9% from a year ago. The 3-month annualized inflation rate fell to 2.7% from 3.7% in September.
That should reinforce that the disinflationary trend is broad-based, giving assurance to the Fed that a snapback in price pressures is unlikely.
