Yields Rebound Amid Inflation Data
Treasury yields rebound after cooler inflation data and strong economic signs.
Anonymous
Key Points
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The August PCE index rose 0.3% month over month, matching economists’ forecast, while core PCE rose 0.2%, below the 0.3% forecast.
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After the inflation report, the market-implied chance of an October Fed rate hike fell to 35% from 45%, according to LSEG.
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Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, described the report as “a glass half empty,” saying inflation’s trend was lower but remained far from the Fed’s target and was not improving; he said the decision would depend on upcoming September inflation data.
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An upward revision to second-quarter GDP growth reinforced signs that the economy remained strong as yields recovered; Brent crude also rose 1% to $103.45 a barrel.
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Economists expected 84,000 jobs in the September employment report, and the article noted that a stronger-than-expected result could push yields higher.
August inflation data came in cooler than expected, sending Treasury yields down as markets bet the Federal Reserve will skip a rate hike in October. The personal consumption expenditures price index rose 3.4% year-over-year, below the 3.7% forecast, while core PCE climbed 3.0%, also beating expectations MarketScreener. The market-implied chance of an October rate hike fell to 35% from 45% LSEG, but yields rebounded by afternoon as stronger economic data and rising energy prices shifted investor sentiment.
The whipsaw reflects a core tension: inflation is cooling, but it remains far above the Fed's 2% target and the economy keeps growing faster than expected. A second-quarter GDP revision showed the economy expanded 2.2% instead of 1.5%, and consumer spending jumped 0.9% in August. Everything now hinges on September's jobs report, where economists expect 84,000 new positions—a stronger reading could push yields right back up.
Why Markets Sold Then Bought Treasuries Back
When the August PCE report hit Wednesday morning, bond traders saw hope. Core PCE rose just 0.2% month-over-month, beating the 0.3% forecast MarketScreener. This slower cooling trend made rate hikes seem less urgent. Within hours, the odds of an October hike collapsed from 45% to 35% according to LSEG, and Treasury yields fell sharply as investors rotated into bonds.
But the rally didn't last. By afternoon, investors remembered that the economy remains strong. Real GDP grew 2.2% in the second quarter—a big upward revision—and consumer spending is holding up. Brent crude oil also rose 1% to $103.45 a barrel, signaling persistent inflationary pressures from energy markets. Yields recovered as traders recalibrated their bets on the Fed's path.
Inflation Stays Well Above the Fed's Target
The data offered mixed signals. Headline PCE is now 3.4% above year-ago levels, and core PCE hit 3.0%—both down from earlier forecasts but nowhere near the Fed's 2% goal. Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, called the report a "glass half empty," noting that while the trend moved lower, it remained "far from the Fed's target and was not improving."
The sticky core reading is what worries rate hawks. At 3.0%, core inflation is 50% above where the Fed wants it. Persistent price pressures in services—which account for more than half of consumer spending—suggest the Fed may need more rate hikes if the labor market stays hot. Adams warned that September's inflation data will be "critical" to the Fed's October decision.
The Jobs Report Becomes the Deciding Factor
With the October rate-hike odds now a toss-up, everything depends on September employment. Economists expect the labor market added 84,000 jobs—a solid but not explosive number. If the report surprises to the upside, markets will interpret it as a sign the economy can handle higher rates, and yields will spike. A disappointing read could cement expectations for a Fed pause.
Fed Officials Hint at Patience
Fed officials have been signaling restraint. New York Federal Reserve President John Williams stated earlier this week that there may not be an "urgency" to raise rates again immediately in October. That dovish tone, combined with cooler inflation data, has given markets permission to trim rate-hike bets. But Fed policymakers will want to see September's full inflation and employment picture before committing to a pause.
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