The Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures index (PCE), rose at the slowest monthly pace in August since late 2020. The core personal consumption expenditures price index, which strips out food and energy prices, climbed just 0.1% month to month in August, according to the Bureau of Economic Analysis today, Friday, September 29. The so-called super core inflation index for services, which has been on the Fed’s watch list lately, also posted the smallest monthly advance since 2020. The super core rate also strips out housing costs. That rate climbed by just 0.1% in August.
The all-items PCE index rose 0.4% in August on a jump in energy prices.
Add in the consensus on Wall Street that the uncertainties introduced by a likely government shut down starting Sunday, October 1, will make the Fed hesitant to raise interest rates, and the financial markets are now pricing in almost no chance of an interest rate increase at the Fed’s November 1 meeting. The CME Fed Watch Tool, which calculates the odds of a Fed move by looking at prices in the Fed Funds Futures market, put the odds of no action by the Fed at the November meeting at 85.8% today, September 29. The odds of no action are up from 80.7% on September 28, from 72.5% on September 22, and from 52.3% on August 22. That’s a huge shift in sentiment in a month.
Today, the Standard & Poor’s 500 dipped 0.20% and the Dow Jones Industrial Average slipped 0.47%. The NASDAQ Composite gained 0.20%. The small cap Russell 2000 gave up 0.43%.
The CBEO S&P 500 Volatility Index (VIX), which I might have suspected to fall on the decline in the odds of an interest rate increase in November, gave up a scant 0.06% to close at 17.33.
If the Fed doesn’t raise rates in November–and is still sticking to its forecast of one more interest rate increase in 2023–that puts the focus on the December 13 meeting. The odds of an increase a that meeting are just 30.8% the CME Fed Watch tool calculates with 65.6% looking for no move. Those odds are essentially holding steady at the moment.
Interestingly given the rising conviction of no move on November 1, the yield on the 10-year Treasury continued to inch up to 4.59% as Treasury prices slipped. The yield on the 2-year Treasury closed at 5.05% and the yield on the 3-month Treasury ended the day at 5.45%.
