Yesterday’s cooler-than-expected inflation report will likely be a relief for Wall Street, particularly as investors hope to see the recent rise in Treasury yields cool and expectations for a Federal Reserve rate hike next month fade, notes Bret Kenwell, US investment analyst at eToro US.
Both headline and core PCE came in below expectations, with their year-over-year readings falling to six-month lows. The inflation battle is hardly over, but this week's numbers are a step in the right direction.
Core PCE YOY % Change
Source: Trading Economics
A meaningful retreat in oil prices would help ease inflationary pressure, but the immediate focus is on Treasury yields. They have risen sharply over the past month even as equities have remained relatively resilient. This report may finally take some air out of that move.
GDP expectations had already been reduced earlier this quarter, so yesterday’s upwardly revised reading is an improvement, too. But it largely brings growth back in line with where expectations started.
The economy is holding up, but momentum remains modest. While the data is backward-looking, the more important takeaway may be that personal consumption came in ahead of expectations, reinforcing the case for a resilient consumer even as inflation continues to outpace wage growth.
Friday’s jobs report and next month’s earnings season should offer more insight into whether that resilience is holding up.
