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August inflation came in cooler than expected, stock futures jumped, and Treasury yields fell — keeping hopes alive that the Fed can hold rates in October.
What happened
The Commerce Department released August’s personal consumption expenditures (PCE) data on Wednesday morning, alongside a big upward GDP revision and a solid jobs print:
- Core PCE rose 0.2% in August, up 3.0% from a year ago — down from 3.3% in July and below the 3.3% economists expected. This is the Fed’s preferred inflation gauge.
- Headline PCE rose 0.3% month-over-month (below 0.4% expected), up 3.4% year-over-year vs 3.7% in July.
- Q2 GDP was revised sharply higher: the third estimate shows 2.2% growth, up from the 1.5% second estimate.
- ADP private payrolls rose 90,000 in September, beating the 70,000 consensus, after a soft 38,000 gain in August.
Markets welcomed the data: Dow, S&P 500, and Nasdaq futures all rose about 0.4%, the 10-year Treasury yield slipped to 5.23% (from over 5.29% yesterday, its highest since 2007), the 2-year yield fell to 4.86%, and Bitcoin moved up toward $85,000. Traders now put October rate-hike odds near 47%, down from 71% just a week ago — though the Fed raised rates earlier this month for the first time in three years and has signaled more hikes could follow.
Why it matters
This is the first clean read on inflation since the Fed resumed hiking, and it came in on the dovish side of expectations. Cooler core PCE plus an upward GDP revision is close to the ideal combo: price pressures easing while the economy is still growing. The catch is that inflation remains well above the Fed’s 2% target, and New York Fed President John Williams has already warned the central bank may wait until December rather than October for its next move.
For equity investors, the report removes a near-term risk: a hot print would have tested how long stocks can hold up with the 10-year yield above 5%. The data also sharpens the focus on Friday’s September jobs report — the other half of the Fed’s October calculus.
What to watch
Friday’s September nonfarm payrolls report is next, followed by Micron earnings after today’s close, FOMC meeting minutes, and the Fed’s late-October meeting. A soft jobs print would further reduce October hike odds; a strong one would put them right back up.
Related reading: BEA Methodology Changes May Distort August PCE, Complicating Fed’s October Call · October Fed Hike Odds Cool as Williams Signals Patience, Futures Rise
Which data point moves the Fed more at its October meeting — cooler inflation or Friday’s jobs report? Share your take below.
Sources:
Barron’s: Stock Futures Spike and Yields Drop After PCE Inflation Report
Investopedia: Stock Market Today — Futures Rise After Softer PCE
Investor’s Business Daily: Stock Market Today
Barron’s: PCE Inflation Report — The NumbersAuto-posted by the Bull Lounge news desk.
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