Anyone who has read or watched any of the commentary from the Fed in the last year will undoubtedly be familiar with the notion that they are keen to “follow the data.” As discussed last week, the Fed has said interest rate cuts are coming, but they have yet to say precisely when or how many. So, that leaves markets to speculate on the timing and magnitude. However, given the additional data released this week, if we’re to follow the data, it is obvious that the time is now.
The July Personal Consumption Expenditures (PCE) data released this morning (Friday, August 30) and the revised Q2 2024 GDP numbers released yesterday (Thursday, August 29) reinforces the narrative of a “soft landing” for the U.S. economy. Inflation remains on a steady path toward the Federal Reserve’s 2% target, and the economy is growing faster than most expected.
PCE Index Overview
The PCE Index, the Federal Reserve’s preferred gauge of inflation, showed a modest increase in July:
- Headline PCE: Rose 0.2% month-over-month, in line with expectations.
- Core PCE (excluding food and energy): Also increased by 0.2% month-over-month.
- Year-over-year Headline PCE: 2.5%, matching June’s figure and multi-year lows.
- Year-over-year Core PCE: 2.6%, unchanged from June and slightly below the 2.7% estimate.
These figures indicate that inflation continues to cool gradually, maintaining the trend observed in recent months.
Income and Spending Data
The July report also provided insights into consumer behavior:
- Personal Income: Increased by 0.3%, slightly higher than the expected 0.2%.
- Personal Spending: Rose by 0.5%, up from 0.3% in June.
- Real Personal Spending (adjusted for inflation): Increased by 0.4%, the highest since late 2023.
This data suggests that consumers are maintaining their spending habits despite the current interest rate environment, which is a positive sign for economic stability.
Implications for Monetary Policy
The latest PCE figures are likely to influence the Federal Reserve’s decision-making process regarding interest rates:
- The data supports the likelihood of a 25 basis point rate cut at the September 18 meeting rather than a deeper 50 basis point cut.
- The consistent cooling of inflation keeps the Fed on track for potential additional rate cuts at subsequent meetings.
- Currently, the market has priced in a 25 basis point cut in September and an additional 75 basis points of cuts by December. Anything short of this will likely be a headwind for equities.
Updated Q2 2024 GDP Numbers
The second estimate of Q2 2024 GDP growth, released yesterday, further supports the “soft landing” narrative:
- GDP Growth Revision: The Bureau of Economic Analysis revised Q2 GDP growth upward to 3.0% quarter-over-quarter annualized, from the initial estimate of 2.8%.
- Consumer Spending: A significant contributor to the upward revision was consumer spending, which was adjusted to 2.9% growth from the previous estimate of 2.3%.
What’s Next
When considered alongside the July PCE data, the updated GDP figures paint a picture of an economy achieving a delicate balance between growth and inflation control. This scenario aligns closely with the Federal Reserve’s goal of a “soft landing,” where inflation normalizes without triggering a recession. As we move into the latter part of 2024, these indicators will be crucial in determining the trajectory of monetary policy (how many rate cuts?) and the overall health of the U.S. economy (will there be a recession?).
Economy
- Markets were flat for the week, with little movement from earnings or economic releases. The S&P 500 was up 0.2%, the Nasdaq was down 0.9%, and the small-cap Russell 2000 was flat.
- The S&P CoreLogic Case-Shiller 20-city home price index in the U.S. rose 6.5% from the previous year, firmly above market expectations of 6%.
- Pending home sales in the U.S. sank by 8.5% from the corresponding period of the previous year, extending the 2.6% drop during June.
- The University of Michigan consumer sentiment for the U.S. was revised to 67.9 in August from a preliminary reading of 67.8 but missed market expectations of 68.
Stocks
- U.S. equities were in positive territory. Financials and Industrials were the top performers, while Technology and Consumer Discretionary lagged. Value stocks led growth stocks, and large caps beat small caps.
- International equities closed higher for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield increased 10 basis points to 3.91% during the week.
- Global bond markets were in negative territory this week.
- High-yield bonds led for the week, followed by government bonds and corporate bonds.
