U.S. stocks advanced on Wednesday as a softer-than-anticipated August inflation reading cooled Federal Reserve rate-hike expectations. The Commerce Department reported the Personal Consumption Expenditures price index rose 3.4% annually, easing market concerns and lifting the S&P 500 and Nasdaq toward monthly gains.
August Inflation Cools While Consumer Spending Surges
The U.S. Commerce Department reported that the Personal Consumption Expenditures (PCE) price index increased 3.4% on an annual basis in August, coming in below the 3.7% estimate anticipated by economists polled by Reuters. On a monthly basis, the headline PCE price index ticked up 0.3%. According to the U.S. Bureau of Economic Analysis (BEA), the headline personal consumption expenditures (PCE) price index ticked up 0.3% M/M and 3.4% Y/Y in August, compared to 0.1% and 3.4% in July and lower than the estimated figures of 0.4% and 3.7%. On a core basis, the PCE price index increased 0.2% M/M and 3% Y/Y in August, versus 0.1% and 3% in July and below the consensus numbers of 0.3% and 3.3%.
Though the Fed officially follows the headline PCE number, officials generally consider core a better gauge of longer-term trends. While the annual increases were less than expected, they came as the Bureau of Economic Analysis changed the way it computes several components of the index. Analysts also noted that recent methodology changes in calculating PCE by the Bureau of Economic Analysis also contributed to a lower reading.
Simultaneously, separate economic data pointed to strong underlying demand. The Commerce Department issued its final estimate for second-quarter gross domestic product, revising real GDP growth up to a 2.2% annualized rate, thanks to solid consumer spending and investments helping to fuel the buildout of AI infrastructure.
Wall Street Reaction and Shift in Federal Reserve Expectations
Financial markets reacted swiftly to the inflation and growth figures. Comments a day earlier by John Williams, president of the New York Federal Reserve Bank, that there is no need to rush additional rate hikes also supported sentiment. Williams said there is room to watch upcoming economic data, but added that if the economy evolves as expected, one more increase by year-end could be appropriate.
“The less-than-feared price data for August may buy the Fed time to await more data and pass on Oct. 28, but still-elevated inflation and a resilient consumer and economy point to another rate hike by year-end,”
Sal Guatieri, a senior economist at BMO Capital Markets
Fed officials have also indicated more rate hikes might be needed if price pressures fail to moderate after the central bank raised interest rates by 25 basis points earlier this month.
This is good news for investors worried about the recent surge in bon…
David Russell, global head of market strategy at TradeStation [implied context from source]
Stock market futures gained ground following the report while Treasury yields were negative. Traders priced in less of a chance of a Fed rate hike in October.
Stock Market Performance Across Sectors
Wall Street major averages advanced during Wednesday’s session, with the Standard & Poor’s (S&P) 500 index at 7,704.47, up 33.63 points (0.44%) from the prior session’s closing level of 7,670.84. The Nasdaq composite rose 228.54 points (0.85%) to 27,026.08, and the Dow Jones industrial average was up 38.84 points (0.08%) at 51,388.76. At 12:41 ET (16:41 GMT), the benchmark S&P 500 was up 0.5% to 7,711.46 points, while the tech-heavy NASDAQ Composite climbed 1% to 27,063.60 points. The blue-chip Dow Jones Industrial Average shed 0.1% to 51,297.09 points. Interest-rate sensitive sectors such as communication services and technology made the biggest gains, even as U.S. Treasury yields rose amid a climb in oil prices. Moderna slumped 5.7% after brokerage Citigroup downgraded its rating on the biotech company to “sell” from “neutral”. The PCE report today was under a microscope as participants try to get a handle on how aggressive the Fed needs to be with future rate increases,
said Steve Wyett, chief investment strategist at BOK Financial. The S&P 500 and Nasdaq climbed on Wednesday, putting both on track to close out September with monthly gains, as a softer-than-anticipated inflation reading cooled expectations that Federal Reserve policy makers would hike rates in October.
Treasury Yields and Upcoming Earnings Focus
The rising prices of crude oil from the US-Iran and increasing diesel fuel costs have stoked inflation worries and pushed US Treasury yields higher. Bond markets saw a partial reversal following the data release, with shorter-tenor Treasury yields pulling back as rate-hike bets receded. However, longer-term maturities remained elevated as oil prices climbed.
Attention on the broader market and economic indicators continues to focus on incoming data releases as participants try to gauge the path of monetary policy.
