The Federal Reserve's key inflation rate came in a touch hotter than expected in the second quarter, as U.S. GDP growth perked up after a slow start to the year, the Commerce Department reported Thursday. The S&P 500 tried to rally after Wednesday's sharp sell-off, but reversed lower in afternoon trade as investors weighed the implications for the rate-cut outlook.
Note to readers: IBD's coverage of June inflation, income and consumer spending released Friday can be found at this link.
Primary Fed Inflation Rate
The Federal Reserve's primary inflation gauge, the core PCE (personal consumption expenditures) price index, rose at a 2.9% annual rate in Q2, above 2.7% forecasts. In Q1, the key Fed inflation rate had accelerated to a 3.7% annualized pace.
Headline inflation slowed to a 2.6% annualized rate in Q2, down from 3.4% in Q1.
The underlying details weren't particularly concerning. Core goods prices rose at a 0.6% annualized rate, after falling at a 0.5% rate in Q1. Health care inflation slowed to 2.4% from 3.8%. Housing inflation may have moderated less than expected, to a 5% rate from 5.7%. Portfolio management services prices, which tend to follow the S&P 500, rose at an 18% annualized rate.
The quarterly core PCE inflation data provides a preview of Friday's big inflation report, which will break out monthly increases in the core PCE price index.
Prior to the GDP data, Wall Street expected a 0.2% increase in core PCE prices for June, lowering the 12-month core PCE inflation rate to 2.5%. However, the above-expected Q2 rise in core PCE prices suggests either June's increase will come in on the high side, or prior data was revised higher.
GDP Growth
The U.S. economy grew at a 2.8% rate in Q2, topping forecasts of 2% growth, following Q1's sluggish 1.4% pace.
Personal consumption expenditures grew at a 2.3% rate, up from 1.5% in Q1, as spending on goods bounced back after a negative start to the year.
Nonresidential fixed investment accelerated to 5.2% growth, as spending on structures fell 3.3% but equipment investment jumped 11.6% and intellectual property product outlays grew 4.5%.
Government purchases and investment added a half-point to GDP growth.
Jobless Claims
New claims for jobless benefits in the week through July 20 fell 10,000 to 235,000 from the prior week's revised figure. Continuing claims dipped 9,000 to 1.851 million.
Federal Reserve Rate-Cut Odds
After Thursday's data, markets were pricing in 7% odds of a quarter-point rate cut at next week's Fed meeting, down from 9% before the GDP report. Markets are fully pricing in a quarter-point move by the Sept. 18 Fed meeting and 10.5% odds of 50 basis points in rate cuts by then, down from 20%.
Odds of three quarter-point Fed rate cuts by the end of the year slipped to 60% from 69%.
S&P 500
After the GDP release, the S&P 500 lost 0.5% in Thursday stock market action, after giving up solid midday gains. The S&P 500 suffered a 2.3% drubbing on Wednesday, its sharpest loss since December 2022.
The 10-year Treasury yield dipped to 4.26% from Wednesday's 4.285% close.
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