The Federal Reserve’s primary inflation rate showed that core price pressures firmed up in September as consumer spending surged. S&P 500 futures pointed higher after the data, as stocks try to regain their footing after the worst two-day decline since the bank crisis broke out in March.
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The September inflation and spending data follows Thursday’s report that the U.S. economy grew at a 4.9% annualized rate last quarter, up from Q2’s 2.1% pace. Growth was fueled by a 4% rise in personal consumption expenditures (PCE). However, fixed investment only grew by 0.8%, with equipment purchases falling by 3.8%.
Core Inflation Rate
The personal consumption expenditures (PCE) price index rose by 0.4% in September, while the annual inflation rate held steady at 3.4% for the third consecutive month.
Typically, the Federal Reserve prioritizes core inflation, which excludes volatile food and energy prices. Core prices increased by 0.3% in September, in line with expectations. However, the core 12-month inflation rate decreased to 3.7% from 3.8% in August.
Personal income rose by 0.3% during the month, while personal consumption expenditures increased by 0.7% in September. Adjusted for inflation, consumer spending rose by 0.4%.
Supercore Inflation
Since late last year, Federal Reserve Chair Powell has focused on core PCE services excluding housing, or supercore services, as a measure of inflation. This aligns with the Fed’s belief that high inflation is primarily driven by a tight labor market and elevated wage growth. As wages make up a significant portion of costs for service businesses, the Fed expects supercore services inflation to decrease as wage pressures ease.
The Q3 data for supercore PCE inflation showed prices rising at an annual rate of 3.5%, slightly higher than in Q2. This data supports the notion that the Fed still has work to do in reducing inflation in this category, which includes health care, haircuts, and hospitality.
S&P 500
S&P 500 futures rose by 0.5%, slightly higher than before the PCE inflation report. Futures also received a slight boost from Amazon (AMZN) rallying on Q3 earnings.
The S&P 500 has experienced a 9.8% decline since its July 31 rally closing high.
The stock market selloff has started to dampen the recent surge in Treasury yields. After falling by 11 basis points on Thursday, the 10-year Treasury yield increased by 3 basis points to 4.88% after the inflation data.
Be sure to read IBD’s daily afternoon The Big Picture column to stay in sync with the market’s underlying trend and what it means for your trading decisions.
Federal Reserve Rate Hike Odds
Prior to the PCE inflation report, markets were not pricing in any chance of a quarter-point Fed rate hike on November 1. The odds of a hike by the December 13 policy update had fallen to 20%.
Even hawkish policymakers have acknowledged that the rise in the 10-year Treasury yield has tightened financial conditions, effectively doing the Fed’s work for them. The recent drop in the S&P 500 further reduces the likelihood of a rate hike.
However, the Fed will want to see consumer spending and the job market begin to decline before taking a rate hike off the table and focusing on the timing of rate cuts. So far, the data has not cooperated, but there are some indications of a softer economic backdrop emerging from earnings calls. Meta Platforms noted softer demand from advertisers in October, while UPS also mentioned “demand softness” in its Thursday earnings call.
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