The core PCE price index, the Federal Reserve's primary inflation gauge, showed that price pressures continued to fade even more than expected in August. The S&P 500 rose slightly as investors weighed the implications for Fed rate cuts at upcoming meetings.
Ahead of the key Fed inflation report, market pricing showed roughly 50-50 odds that the Fed will cut its benchmark interest rate by another 50 basis points, instead of a quarter-point cut, at the next meeting on Nov. 7.
PCE Inflation Report Hits And Misses
The personal consumption expenditures, or PCE, price index rose 0.1%, in line with Econoday's 0.1% consensus forecast. The 12-month headline inflation rate eased to 2.2% from 2.5%, undercutting 2.3% estimates. Headline PCE inflation hasn't been lower since February 2021.
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 0.1% in August, below 0.2% forecasts. However, the 12-month core inflation rate ticked up to 2.7%, as expected.
On an unrounded basis, the core PCE price index rose 0.13% in August, still quite tame. The 12-month core PCE inflation rate edged up from 2.65% in July to 2.68% in August.
On a 3-month annualized basis, core PCE inflation is running 2.1%, up from 1.9% in July. However, the six-month annualized core PCE inflation rate eased to 2.4% from 2.6%. That's the lowest it's been since December.
China Stocks Keep Running As Markets Send This Bullish Signal
Personal Income, Spending
The PCE price index is part of the Commerce Department's monthly personal income and outlays report. Personal income rose just 0.2% vs. 0.4% forecasts.
Personal consumption expenditures climbed 0.2% in August, below 0.3% estimates.
Federal Reserve Rate-Cut Outlook
After August's core PCE inflation data, market pricing showed 54% odds that the Fed will follow up this month's half-point rate cut with another outsized move at the next meeting after the election. Odds of another big Fed rate hike stood at 49% on Thursday.
Markets see 76% odds of 75 basis points in Fed rate cuts over the year's final two meetings, up from 72%.
Fed rate-cut projections released on Sept. 18 penciled in one percentage point worth of rate cuts by the end of 2024. That implies a quarter-point move at each of the year's final two meetings. Federal Reserve Chairman Jerome Powell has said further softening of the labor market could precipitate deeper rate cuts.
However, Fed Gov. Christopher Waller said this week that he also would be open to another big rate cut if inflation cools more than expected.
S&P 500
After the PCE inflation report, the S&P 500 added 0.1% in early Friday stock market action. On Thursday, the S&P 500 rose 0.4% to a new record, up more than 20% year to date.
The 10-year Treasury yield dipped two basis points to 3.77% amid softer-than-expected income and spending gains.
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.
