Progress in curbing inflation decelerated in October, but futures market investors believe that the latest data increases the likelihood of another interest rate cut by the Federal Reserve next month.
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Although progress in controlling inflation slowed down in October, investors still believe that a Fed rate cut in December is a possibility.
The Federal Reserve’s preferred inflation measure indicated that the yearly increase in the price of goods and services moved further away from the central bank’s 2 percent target in October.
With annual growth at 2.3 percent in the Personal Consumption Expenditures (PCE) price index, up from 2.1 percent in October, the Bureau of Economic Analysis reported on Wednesday.
Despite this, bond market investors remained unfazed as monthly inflation readings aligned with expectations.
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Yields on 10-year Treasury notes, a gauge for mortgage rates, decreased by 6 basis points on Wednesday, while futures markets monitored by the CME FedWatch tool showed an increased probability of a rate cut on December 18 to 66 percent, up from 59 percent on Tuesday.
Upward trend in annual inflation
Annual Core PCE, excluding food and energy costs, rose to 2.8 percent in October, up from 2.7 percent in September, marking the highest reading since April.
The 0.2 percent and 0.3 percent month-over-month increases in the PCE and core PCE indexes were in line with predictions.
Samuel Tombs
The significant increase in core PCE was driven by substantial rises in certain volatile components such as used car prices and airline fares, as noted by Pantheon Macroeconomics Chief U.S. Economist Samuel Tombs in a client communication.
“Price pressures in October remained subdued outside of these volatile sectors,” Tombs stated, and leading indicators like the jobs quits rate and a survey indicating fewer businesses planning to hike prices “indicate that underlying services inflation will decrease in the coming months.”
Economists at Pantheon Macroeconomics believe that the November PCE data will give the Fed the confidence to lower the funds rate at the upcoming meeting for the third consecutive time, according to Tombs.
On Wednesday, the Bureau of Economic Analysis also released its second estimate of Q3 2024 gross domestic product (GDP), confirming an initial estimate that the economy expanded at a healthy annual rate of 2.8 percent, down from 3.0 percent in Q2.
Robust economic expansion
Although the economy experienced negative growth in Q1 2022, stock market indices continue to hit new highs as investors grow more confident in the Fed’s ability to achieve a soft landing and avoid a recession, defined as two consecutive quarters of negative growth.
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Contact Matt Carter via email