Core PCE: In line but not enough to lower Fed rate hike expectations
One of the three key events of the week took place early Wednesday, though it did little to change investor expectations of a Federal Reserve rate hike next month. The core personal consumption expenditures price index , the Fed’s preferred inflation metric, rose 0.2% in July compared to June, and 3.3% year over year. Both readings matched Dow Jones estimates. While the report didn’t exceed expectations, it didn’t spark much enthusiasm on Wall Street either. Stocks remained flat to lower on the day, with traders next awaiting Nvidia’s latest quarterly report due after the close. Treasury yields were also little changed. “Today’s mild upside inflation surprise and relative economic strength weren’t necessarily what investors —or the Fed — wanted to see. It wasn’t enough to shift the balance for September’s FOMC meeting,” said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management. The CME Group’s FedWatch tool shows fed funds futures are pricing in a 40% probability that the central bank will increase its overnight rate by a quarter percentage point in September. That’s about in line with Tuesday and well above the 33% chance seen a week ago. “If subsequent data point in the same direction, the Fed may feel more pressure to move off the sidelines,” Zentner said. Here’s what other investors, strategists and economists around Wall Street said about the July PCE report: Chris Zaccarelli, chief investment officer for Northlight Asset Management: “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.” Peter Boockvar, chief investment officer at One Point BFG Wealth Partners: “Bottom line, CapEx on the GenAI data center build is still dominating the ordering of durable goods. With all of the above, no real reaction in Treasury yields as they stand about where they were just before the release. PCE in particular always comes weeks after CPI and PPI and thus rarely deviates from expectations.” David Russell, global head of market strategy at TradeStation: “The economy remains strong and inflation isn’t dropping. Strong consumption, spending and durable goods orders suggest the committee has room to tighten without causing a recession. These numbers support hawkish policymakers at the Fed’s committee and increase pressure on Kevin Warsh later this week. It’s getting harder for him to dodge the issue of hiking rates.” Addison Maier, portfolio manager at Janus Henderson Investors: The three big drivers of inflation this year have been energy, tariffs, and AI. While energy prices remain volatile, we have seen a modest easing in goods prices as we’ve lapped last year’s tariffs. The AI buildout shows no signs of slowing, but warrants watching closely … as any signs of a slowdown here will have meaningful implications for U.S. inflation, growth and interest rates.” Heather Long, chief economist at Navy Federal Credit Union: “The impacts of the war in Iran are still apparent with $4 gas and $5.60 diesel. The data still gives the Federal Reserve time to wait and see. It’s not getting worse, but it didn’t get any better in July either. A trade war with Canada will only exacerbate inflation woes. Meanwhile, consumer fatigue is real. Spending adjusted for inflation was flat in July.” Bret Kenwell, U.S. investment analyst at eToro: “The bigger concern is inflation, particularly with PCE serving as the Fed’s preferred gauge. Inflation remains well above the Fed’s 2% target, and a hotter-than-expected reading could renew pressure on policymakers to keep interest rates higher for longer. That could put pressure back on equities, particularly if yields continue to push higher.”
