A commmentary by John Kerschner, Head of US Securitised Products at Janus Henderson Investors, on May’s PCE report.
“This morning, the May PCE Price Index came in slightly below market predictions, indicating to investors that inflation continues to slow and setting up the Fed for a potential interest rate cut later this year. Headline PCE was 0.0%, bringing the year-on-year number to 2.6%. The market had expected a small increase in the 0.03% to 0.06% range. The more important Core PCE Price Index (excluding food and energy) came in at 0.1%, with a year-on-year number also at 2.6%. This reading was slightly below expectations, which ranged from 0.11% to 0.16%.
Perhaps most importantly, the PCE Core Services Less Housing number came in at only 0.1%, bringing the year-on-year number to 3.3%. This number had averaged 0.4% on a monthly basis so far in 2024, causing the Federal Reserve to fear that while goods inflation continued at a negative rate, services inflation was too hot to consider a rate cut. These new numbers will go a long way in alleviating those fears. The US Treasury market rallied slightly on the news, but more importantly, the market is now giving the Fed the green light to consider a rate cut at their September 18th meeting.
Currently, the odds for a rate cut at that meeting are approximately 75%. While Federal Reserve officials are likely to stay on message in the coming weeks, saying they are “data dependent,” we will be paying attention to see if they try to talk down these rate cut expectations or perhaps even reinforce them. We still have two rounds of inflation data before that meeting, and it is looking more and more likely that the slowing inflation data will give the Fed cover to start rate cuts later this year.”
