On the evening of the 30th, US stocks opened higher. The key PCE inflation index closely watched by the Federal Reserve rose by 2.5% year-on-year, and the core PCE index rose by 2.6% year-on-year, indicating moderate inflation. This data reinforces expectations of a 25 basis point interest rate cut by the Federal Reserve, with some financial institutions even predicting a 50 basis point cut.
As of the time of writing, the three major indices collectively rose, $Dow Jones Industrial Average (.DJI.US)$ Up 0.21%,$Nasdaq Composite Index (.IXIC.US)$ Up 0.87%, $S&P 500 Index (.SPX.US)$ Up 0.63%.
According to data released by the US Department of Commerce on Friday, August 30, 2024, the US Personal Consumption Expenditures (PCE) price index rose by 2.5% year-on-year in July.
The data also shows that the core PCE price index, which excludes food and energy prices, rose by 0.2% month-on-month and 2.6% year-on-year in July. Adjusted for inflation, consumer spending increased by 0.4%, rebounding from the previous month.
PCE data is the preferred measure of potential inflation by the Federal Reserve and an important reference for judging the level of inflation in the United States. The core PCE price index, which reflects service inflation, is particularly closely watched. The Federal Reserve closely monitors this indicator, which may still influence policy makers' interest rate decisions in September.
The July PCE index rose at a moderate pace, with household spending remaining stable. This indicates that the Federal Reserve's monetary policy makers have been able to suppress price pressure without causing significant pain to consumers.
After the release of the July PCE price index in the United States, some financial institutions predict that the Federal Reserve will cut interest rates by 50 basis points in September.
Currently, both the nominal inflation rate, represented by the Consumer Price Index (CPI), and the year-on-year growth rate of the core PCE price index closely tracked by the Federal Reserve, have shown an overall decline, paving the way for the Federal Reserve to start a rate-cutting cycle in September. It is widely expected that the Federal Reserve will reduce interest rates by 25 basis points in September.
However, given that the US Department of Labor has just revised non-farm employment data downward significantly, many economists are worried that the health of the US job market may be worse than indicated by official data, and the risk of a 'hard landing' for the US economy is also increasing.
Analysts say that Friday's PCE inflation data solidify the scenario of a 25 basis point interest rate cut by the Federal Reserve.
The data performance is basically in line with expectations, with almost no change in yield, and the market is still betting on a small rate cut next month. Traders still expect a significant rate cut in November or December, but if prices continue to gradually cool down without a larger-than-expected decline, the market may reconsider this expectation.
Some financial institutions believe that the Fed may cut interest rates by 50 basis points at its September interest rate meeting to hedge against economic downside risks.
At the Jackson Hole Federal Reserve annual meeting held last week, Fed Chairman Powell sent the strongest signal to date, saying "now is the time to relax monetary policy," and the economic data in the past few months have convinced the Fed that inflation is steadily returning to the central bank's target level of 2%.
Burns McKinney, Managing Director and Portfolio Manager at NFJ Investment Group, said, "The rate cut in September is already certain, and the trend of PCE will not change this. The Fed has made up its mind and has clearly communicated that they will begin a rate cut cycle in September."
Gregory Daco, Chief Economist at EY, expects the core PCE inflation rate to slow to around 2.5% by the end of 2024, as housing cost inflation eases, wage growth slows, and productivity growth strengthens.
According to the Chicago Mercantile Exchange's "FedWatch" tool, the probability of a 25 basis point rate cut by the Fed in September is 69.5%, while the probability of a 50 basis point rate cut is 30.5%. The probability of a cumulative 50 basis point rate cut by November is 51.2%, the probability of a cumulative 75 basis point rate cut is 40.8%, and the probability of a cumulative 100 basis point rate cut is 8.1%.
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Editor / jayden