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, or PCE. But fixed investment grew just 0.8%, as equipment purchases fell 3.8%.
Core Inflation Rate
The personal consumption expenditures, or PCE, price index rose 0.4% in September, while the annual inflation rate held at 3.4% for a third-straight month.
Typically, Federal Reserve decision-making puts more weight on core inflation, which strips out volatile food and energy prices. Core prices rose 0.3% in September, matching estimates, while the core 12-month inflation rate eased to 3.7% from 3.8% in August.
Personal income rose 0.3% on the month, while personal consumption expenditures surged 0.7% in September. Adjusted for inflation, consumer spending rose 0.4%.
Supercore Inflation
Starting late last year, Federal Reserve chair Powell shifted the inflation focus to core PCE services excluding housing, or supercore services. That’s in keeping with the Fed’s view that the tight labor market and elevated wage growth have been at the root of stubbornly high inflation. Wages make up a high percentage of costs for service businesses. Therefore, supercore services inflation should ease as wage pressures moderate.
The Q3 data for supercore PCE inflation showed prices rising at a 3.5% annual rate, a touch higher than in Q2. The data confirm that the Fed still has a long way to go to bring down inflation for this category of spending, which includes health care, haircuts and hospitality.
S&P 500
S&P 500 futures rose 0.5%, up slightly from before the PCE inflation report. Futures also are getting a slim boost from Amazon (AMZN) rallying on Q3 earnings.
The S&P 500 has fallen 9.8% from its July 31 rally closing high.
The stock market selloff has begun to blunt the recent surge in Treasury yields. The 10-year Treasury yield, after falling 11 basis points on Thursday, ticked up 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
Ahead of the PCE inflation report, markets were pricing in no chance of a quarter-point Fed rate hike on Nov. 1, while odds of a hike by the Dec. 13 policy update had fallen to 20%.
Even hawkish policymakers have said lately the rise in the 10-year Treasury yield has tightened financial conditions, doing the Fed’s work for it. The recent drop in the S&P 500 further dampens the chances of a rate hike.
Still, the Fed will want to see consumer spending and the job market begin to roll over before taking a rate hike off the table and shifting the focus to the timing of rate cuts. So far the data isn’t cooperating, but some hints of a softer economic backdrop are emerging from earnings calls. Meta Platforms (META) noted softer demand from advertisers in October, while UPSUPS also noted “demand softness” in its Thursday earnings call.
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