The Dow Jones Industrial Average (DJIA) rebounded on Friday, trimming midweek losses as investors leaned on hopes of a follow-up Federal Reserve (Fed) rate cut in October. The US Personal Consumption Expenditures (PCE) Price Index aligned with forecasts, keeping market expectations of policy easing intact.
Inflation steady, rate cut bets remain high
Core PCE inflation held at 2.9% YoY in August, matching forecasts, with the monthly figure unchanged at 0.2%. Headline PCE accelerated to 0.3% MoM and 2.7% YoY. Despite steady inflation, the reading was not strong enough to revive hawkish concerns at the Fed.
Markets continue to favor further easing. According to the CME FedWatch Tool, traders are pricing in nearly 90% odds of a 25 bps cut at the October 25 meeting, following September’s quarter-point reduction. Personal income and spending rose 0.4% and 0.6% respectively, highlighting resilient household demand, though rising wage pressures could complicate the Fed’s policy path if inflation proves sticky.
Consumer sentiment eases, inflation expectations still elevated
The University of Michigan’s September survey showed consumer sentiment and expectations slipping slightly from the prior month. Inflation expectations edged lower but remain elevated, with the one-year outlook at 4.7% and the five-year view at 3.7%.
Persistently high inflation expectations risk becoming entrenched, as households may continue to anticipate above-trend price growth. This could reinforce business pricing behavior, potentially limiting the Fed’s ability to deliver deeper rate cuts.
