The story has been updated with additional details from the economic reports, market reaction and analyst comments.
The personal consumption expenditure (PCE) index, dubbed as the Fed's preferred inflation gauge, came in a tad above forecast, although the core rate aligned with the consensus, a Bureau of Economic Analysis (BEA) report released Wednesday showed. The mixed inflation reading could decisively tilt the odds in favor of another pause at the September rate-setting meeting.
Inflation Data Vs. Expectations
| July Actuals | Consensus | June Reading | |
|---|---|---|---|
| PCE (M-o-M) | 0.2% | 0.1% | -0.1% |
| Core PCE (M-o-M) | 0.2% | 0.2% | 0.1% |
| PCE (Y-o-Y) | 3.7% | 3.6% | 3.7% |
| Core PCE (Y-o-Y) | 3.3% | 3.3% | 3.3% |
Personal income climbed 0.4% month over month (MoM), while the consensus estimate had modeled a 0.2% increase, the same pace as in the previous month. At the same time, personal spending rose 0.2% compared to the 0.1% consensus and June's 0.3% pace. Disposable personal income was up 0.5%, and personal savings stood at $712 billion, rendering the savings rate at 3%.
The income data suggest households retained some spending power in July, while the increase in consumption indicates that consumer demand remained resilient. The combination of firmer income growth and continued spending will be closely watched by policymakers as they assess the strength of the economy.
In a separate report, the BEA maintained its GDP estimate to 1.5%, same as that of the advance estimate. Economists had expected an unrevised 1.5% growth, accelerating from the 2.1% pace seen in the first quarter. Consumer spending, exports and investment contributed to second-quarter growth, partly offset by a decline in government spending.
Meanwhile, durable goods orders rose 1.1% M-o-M in July, with the growth significantly exceeding the 0.4% pace expected by economists and a revised 0.5% increase in June. Excluding transportation, new orders rose 0.4%, while orders excluding defense climbed 1.3%. Transportation equipment led the increase, rising 2.3% after two consecutive monthly declines.
Non-defense capital goods orders, excluding aircraft and parts, a measure of capital spending, climbed 0.2%, versus the 0.9% estimate, and slowing notably from the 1.9% rise in June
The July PCE inflation data assumes added significance as it comes just ahead of Fed Chair Kevin Warsh’s address at the Jackson Hole Economic Policy Symposium. Warsh is scheduled to deliver his keynote address at 10 a.m. ET on Friday.
Market Reaction
Markets were largely cautious amid the data release, with investors also awaiting Warsh’s Jackson Hole address and Nvidia’s earnings. The dollar edged up, and the U.S. Treasury yields edged higher, with the 10-year Treasury yield at around 4.65%.
The E-mini S&P 500 futures (ES) market is showing a relatively a bullish divergence, with 75% of profitable traders and 58.3% of unprofitable traders holding long positions, according to MarketFramework's Positioning Edge tool.
The slightly hotter-than-expected headline PCE reading could put some upward pressure on Treasury yields and the dollar, as it suggests inflation remains above the Fed’s 2% target. However, the core PCE rate holding at 3.3% and matching expectations could limit the market reaction.
Investors will now look to Warsh’s remarks for additional clues on the Fed’s reaction function and the likelihood of a September rate move. The market will also continue to assess incoming employment and inflation data before the September meeting.
Analysts React
Although many of the PCE numbers were worse than expected, the most important one , namely the YoY Core PCE held constant, and that will give the Fed more time to leave rates on hold, said Northlight Asset Management Chief Investment Officer Chris Zaccarelli.
“The number of dissenters at the next meeting may grow because the month-over-month readings (headline and core) are getting worse, but we believe enough of the FOMC will want to wait to see more data before making a decision to raise rates next month. The fact that there is a national election in November wouldn’t prevent the Fed from raising rates if there was a dire enough need to move quickly, but today’s data should be enough to have caution (e.g. leaving rates unchanged) be the higher priority.
Weighing in on the market trajectory, Zaccarelli said he remains cautious in the near term, but expects the market to end the year higher, once the election is past, especially if the Fed decides to leave rates unchanged for the remainder of the year.
The strategist also highlighted the seasonality of September and October being traditionally weak months for the stock market and mid-term election years, such as this one, typically being weak in the six to eight weeks prior to an election.
