The core PCE price index, the Federal Reserve’s primary inflation gauge, showed that price pressures continued to fade in July. Yet solid wage data hinted that next week’s jobs report may be stronger than expected. The S&P 500. after a false start, motored ahead on Friday afternoon as investors weighed the implications for next month’s Fed meeting and the rate-cut outlook.
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How The Fed’s Interest Rate Cuts And Hikes Are Influenced By The PCE Report
Despite tame inflation data of late, the stronger-than-expected income gains and continued solid spending may dampen the likelihood of a big rate-cut at the upcoming Fed meeting.
Primary Fed Inflation Rate
The personal consumption expenditures, or PCE, price index rose 0.2%, in line with Econoday’s consensus forecast. The 12-month headline inflation rate held at 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 July, meeting forecasts. The 12-month core inflation rate held at 2.6%, improving on 2.7% estimates.
On an unrounded basis, the core PCE price index rose 0.16%. On a 3-month annualized basis, core PCE inflation ran at a tame 1.7% annualized rate.
Personal Income, Spending
The PCE price index is part of the Commerce Department’s monthly personal income and outlays report. Personal income rose 0.3%, above 0.2% forecasts.
Personal income got a lift from 0.35% growth in wages and salaries. That’s far stronger than suggested by the July jobs report, which showed flat aggregate pay during the mid-month survey week. The difference suggests that the August jobs report will show a firmer backdrop for income. That may mean revisions to July data or strength in August.
Personal consumption expenditures climbed 0.5% in July, matching estimates of a strong spending month.
Federal Reserve Rate-Cut Outlook
After July’s core PCE inflation data, market pricing showed 30.5% odds that the Fed will kick off its rate-cutting cycle with a half-point move at the Sept. 18 meeting. That was down slightly from 32.5% ahead of the report.
Markets see 70% odds that the Fed will cut its key rate by a full percentage point over the year’s final three meetings, meaning one of the meetings will see a half-point cut.
Odds of a half-point cut at the September meeting already dimmed slightly in recent days. Second-quarter GDP growth was revised up to 3% from 2.8% and initial jobless claims continued to drift lower, reversing July’s upward trend.
Last week, Federal Reserve Chairman Jerome Powell turned more dovish in his Jackson Hole, Wyo., speech, saying that policymakers want to avoid any further softening of the labor market.
A soft July jobs report next Friday could shift Fed rate-cut odds. However, the FactSet consensus forecast of 160,000 new jobs likely wouldn’t be soft enough to prompt a more aggressive Fed response.
S&P 500
The S&P 500 rose 1% in Friday stock market action, after giving up solid morning gains following the PCE inflation data and spending figures. On Thursday, the S&P 500 finished a hair below the flat line, but kept its footing amid volatility following Nvidia‘s (NVDA) Wednesday earnings report. As of Friday afternoon, the S&P 500 sat just 0.3% below its July 16 record closing high, up 18.4% for the year.
The 10-year Treasury yield rose four basis points to 3.91% amid firm spending and passable income 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.
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