PCE backs sentiment, September rate cuts likely

PCE

This past Friday, the Fed’s preferred measure of inflation, the personal consumption expenditures (PCE), released. Headline PCE rose 0.20% on a month-to-month basis and 2.50% on a year-over-year basis, falling in line with expectations. Core PCE, which removes volatile food and energy prices, increased 0.20% on the month, also falling in line with expectations. Market sentiment following the release has been positive, as both core and headline on a 12-month basis held steady in July. The encouraging release backs up the August 23 statements made by Fed Chair Jerome Powell as he mentioned “the timing and pace of rate cuts will depend on incoming data.” PCE was the most important data release to occur before the Fed’s highly anticipated September meeting.

Economy

Real gross domestic product (GDP) grew at an annual rate of 3.00% in the second quarter of 2024, according to the “second” estimate released by the U.S. Bureau of Economic Analysis (BEA). The release, a revision of the advanced estimate provided earlier by the BEA, was 0.20% above estimates and 1.60% higher than the first quarter measure. The increase in real GDP primarily reflected increases in consumer spending, private inventory investment, and nonresidential fixed investments. Latest GDP revisions provided by the BEA show healthy U.S. economic activity during the second quarter, which tracks alongside the recent uptick in consumer sentiment, the first increase in five months.

Turning to the labor market, in the week ending August 24, seasonally adjusted initial claims were 231,000, a decrease of 2,000 from the prior week's level. Although claims are retreating from an 11-month high in July, unemployment has increased each of the past four months, demonstrating a softening labor market. This cooling of the labor market will be highly monitored by the Fed, as Powell mentioned at the Jackson Hole Symposium, “We do not seek or welcome further cooling in labor market conditions.”

Fed cuts

Considering both Powell’s message that the time has come for Fed policy to change and market sentiment following the encouraging inflation release, it seems we are officially on for rate cuts in September. Currently, around 70% of the market is preparing for a 25-point cut, with the other 30% favoring a more substantial 50-point cut. In either scenario, companies should continue to monitor their exposures. Although we are certainly moving in the direction of lower rates, there is still a lot of work to be done and it would be wise to remain prepared for a multitude of outcomes

The week ahead

Despite a shortened week following the Labor Day holiday, economic releases pick up as we move into the week, with both August non-farm payrolls and unemployment releasing Friday.