We Are Now At The 'Soft Landing': Economists, Markets React To Subdued PCE Inflation Data

The Personal Consumption Expenditure (PCE) price index, widely regarded as the Federal Reserve’s preferred measure of inflation, exhibited a noteworthy slowdown in October.

The PCE annual inflation rate eased from 3.4% year-on-year in September to 3% in October, as expected. This downtrend matches economist expectations and marks a return to June 2023 levels, which were the lowest since March 2021.

One of the most striking aspects of the report is the stagnation in the month-on-month progression of the PCE price index. After a 0.4% jump observed in September, the index remained flat in October, falling below the expected 0.1% increase.

Economists’ Take on the PCE Report

• Jamie Cox, managing partner for Harris Financial Group, highlighted the significant deceleration in inflation, noting, “These data solidly mark the end of the rate cycle,” which might not bode well for those hoping for a hawkish stance from Fed Chair Jerome Powell.
  
• Quincy Krosby, chief global strategist for LPL Financial, emphasized that inflationary pressures continue to moderate but questioned whether it will be sufficient for the Fed to declare a final victory over inflation.
  
• Jeffrey Roach, chief economist for LPL Financial, offered an optimistic perspective, suggesting that inflation might cool faster than expected, leading to potential market surprises. He also hinted at the likelihood of Fed officials adjusting their language to prepare markets for a subtle shift in policy stance.
  
• Kathy Jones, chief fixed income strategist at Charles Schwab, found encouragement in the month-to-month slowing of the core PCE readings. She noted core PCE rose by 0.3% or less for eight consecutive months, and on a three-month annualized basis, it is approaching the Fed’s 2% target.
  
• Jason Furman, professor of economic policy at Harvard University, cautiously remarked, “I’m later to proclaim it than many others, but we’re almost at the soft landing.”
  

Market Reactions

Traders are currently factoring in a 77% likelihood of a rate cut by May 2024, with a 52% probability of five cumulative rate cuts by the end of December 2024.

Despite witnessing a muted October PCE inflation report, investor risk appetite showed signs of weakness on Thursday.

The SPDR S&P 500 ETF Trust SPY experienced a slight decline of 0.1%, while the technology-focused Invesco QQQ Trust QQQ saw a more noticeable drop of 0.8% as of 11:30 a.m. ET.

In contrast, traditional blue-chip stocks, represented by the SPDR Dow Jones Industrial Average ETF DIA, demonstrated resilience with a rally of 0.6%.

The bond market also negatively reacted, as Treasury yields edged upwards. This was reflected in the iShares 20+ Year Treasury Bond ETF TLT, which fell by 0.8%.

Sector-wise, financials led the performance with the Financial Select Sector SPDR Fund XLF gaining 0.8%. On the other hand, communication services and consumer discretionary sectors showed relative weakness. The Communication Services Select Sector SPDR Fund XLC and the Consumer Discretionary Select Sector SPDR Fund XLY dropped by 1.1% and 0.8%, respectively.

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