Headline
The Fed's favored inflation indicator surpasses expectations, instigating market unease due to apprehensions surrounding potential interest rate reductions.
November's inflation rate was less than anticipated, as per the Federal Reserve's preferred inflation measure, which in turn dampens investor and borrower anticipations of significantly lower interest rates in 2025.
Key Facts
The core personal consumption expenditures index increased by 2.8% year-on-year, as suggested by the data released Friday morning by the Commerce Department. This figure matches October's reading.
The reading for the core PCE, which measures consumer spending on goods and services beyond more volatile categories such as food and energy, was found to be better than the median economist forecasts of 2.9%, as per Dow Jones data.
The headline PCE inflation stood at 2.4%, falling short of estimates of 2.5%, but still higher than October's 2.3%.
The market reacted positively to the release, with 2-year and 10-year Treasury bond yields decreasing by over five basis points each, indicating more valuable bonds. Stocks also recouped earlier losses, as S&P 500 futures shifted from a 0.8% loss to a 0.4% one.
Key Background
This inflation report was released on Friday, while the financial sector grapples with a familiar problem: a stock market selloff that can be traced back to pessimism over monetary policy due to ongoing inflation concerns. The Federal Reserve's quarterly summary of economic projections, released on Wednesday, revealed that the median central banker forecast calls for 2.5% core PCE inflation by the end of next year. This is an increase from the 2.2% projected in September and remains above the Fed's 2% goal. This more pessimistic inflation forecast, potentially linked to the inflationary policies supported by President-elect Donald Trump, also saw the forecast for end-of-2025 interest rates rise from 3.4% to 3.9%. This shift in sentiment led to significant stock market losses on Wednesday (3% for the S&P 500) and continued during pre-market trading, with S&P futures declining nearly 1% prior to the PCE release as the benchmark index heads towards its worst week since August.
Further Reading
Trump Hasn't Taken Office Yet, but He's Already Unnerving the Fed. (Wall Street Journal)
Fed Announces Another 0.25% Interest Rate Cut—However, 2025 Rate Cuts May Be Scarce. (Our Website)
The core PCE inflation, which is a preferred measure of the Federal Reserve, came in at 2.4% for November, falling short of the anticipated 2.5%. This lower-than-expected figure might influence expectations of future interest rate cuts.
The core personal consumption expenditures index, a key indicator of consumer spending, increased by 2.8% year-on-year, aligning with October's figure and the median economist forecasts.
The positive market reaction to the inflation report saw 2-year and 10-year Treasury bond yields decrease, suggesting an increased demand for more valuable bonds. The stock market also recovered, with S&P 500 futures shifting from a loss to a gain.
Despite the lower-than-expected inflation rate, the Federal Reserve's median central banker forecast for 2025 interest rates has risen due to ongoing inflation concerns and more pessimistic inflation forecasts, potentially linked to the inflationary policies supported by President-elect Trump.
