According to a report from Reuters, consumer spending in the United States experienced an increase during the month of August. However, there was a decrease in underlying inflation, as the year-on-year increase in prices, excluding food and energy, fell below 4.0%.
The surge in gasoline prices contributed to an increase in inflation, as measured by the personal consumption expenditures (PCE) price index. In August, there was a 0.4% rise in the PCE price index, following a 0.2% increase in July. Over the 12-month period ending in August, the PCE price index rose by 3.5%, compared to a 3.4% increase in July. It is important to note that the annual PCE inflation is also influenced by a lower base of comparison from the previous year.
STOCKS: The gains in U.S. stock futures were further extended following the release of the August PCE data.
BONDS: The yield on the U.S. Treasury 10-year note continued to decline, reaching 4.5363% after the data.
FOREX: The dollar index experienced further losses subsequent to the data.
RANDY FREDERICK, MANAGING DIRECTOR OF TRADING AND DERIVATIVES, CHARLES SCHWAB, AUSTIN, TEXAS
"The data aligns with expectations, which is crucial for the markets. If the data were to be excessively strong, concerns about inflation would arise, whereas if it were to be excessively weak, concerns about the Federal Reserve's excessive tightening would emerge."
I am of the opinion that the recent development does not have any significant impact on the Federal Reserve's policies, and I do not anticipate any changes in November. Presently, the likelihood of a rate hike stands at approximately 40%, which is historically insufficient as it must exceed 65% for implementation.
According to Daniel Porto, Head of Bank Infrastructure at Deaglo in London, this development reinforces the Federal Reserve's stance and aligns with the expectation that they will maintain the current rates for an extended period to allow the economy to absorb the effects of the recent hikes.
These are challenging conditions to navigate, as they assume sustained modest growth, relatively low employment, and a stable economy. The Federal Reserve is expected to prioritize inflation, but the question remains whether this course can be sustained without causing significant damage.
Kim Forrest, Chief Investment Officer at Bokeh Capital Partners in Pittsburgh, expresses optimism about the declining inflation and its potential impact on interest rates. She notes that the numbers are very positive, even though the drop is not significant.
Peter Cardillo, Chief Market Economist at Spartan Capital Securities in New York, observes that while prices have increased on a monthly basis, overall inflation is decreasing. This is good news for the market, as the Federal Reserve is closely monitoring the core rate. He believes that the Fed will maintain its hawkish tone, but may stop raising interest rates if inflation and labor data continue to weaken in the coming months.
However, Cardillo does not foresee a soft landing, given the ongoing strikes, high oil prices, and elevated inflation. He believes that the Fed may struggle to navigate these challenges, especially as consumers begin to feel the impact of higher interest rates and financing costs.