Dont Worry About a Hot CPI Inflation Report; Federal Reserve Rate-Hike Odds Dive

Title: Federal Reserve Signals Potential Delay in Rate Hike Amidst Positive Inflation Data

Subtitle: Markets React as Core PCE Price Index Offers Hope for Fed’s Inflation Goal

Federal Reserve policymakers have indicated that the recent surge in the 10-year Treasury yield has reduced the likelihood of a rate hike scheduled for November 1. The announcement came as Wednesday’s producer price index (PPI) data offered positive news for the Fed’s primary inflation rate, the core personal consumption expenditures (PCE) price index.

According to the PPI data, airfares and portfolio management service fees have both experienced a decline, while inflation in healthcare services remained low. This supports Fed Governor Christopher Waller’s suggestion that the tightening up of financial markets will help alleviate the necessity of a rate hike.

The core PCE price index, which measures price pressures on a range of goods and services, has shown a significant easing over the past three months, specifically through August. However, Wall Street economists anticipate a rise in both the core consumer price index (CPI) and overall CPI inflation rates in September. Even so, these rates are still projected to be lower than the figures witnessed in previous months.

Surprisingly, although August saw a larger-than-expected rise in the core CPI, the S&P 500 finished slightly higher. This indicates that markets are cautiously optimistic about the inflation outlook. There is a growing understanding that the excessive weight housing carries in the CPI makes it less representative of consumer outlays compared to the core PCE price index.

The PPI, which provides essential inputs for the core PCE inflation report, including healthcare services prices and airfares, further supports the theory of lower core PCE inflation. Recent data has revealed a decrease in airline services prices and portfolio management fees, both contributing to a lower core PCE inflation rate.

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These developments have led investors to reevaluate the odds of a Fed rate hike in November and December. Markets are now pricing in lower probabilities for this monetary policy move.

Meanwhile, the S&P 500 is approaching its 50-day moving average, a significant technical indicator. As a result, investors are being urged to exercise caution and closely monitor market dynamics.

In conclusion, the Federal Reserve’s response to the recent rise in the 10-year Treasury yield indicates a potential delay in the planned rate hike on November 1. However, Wednesday’s producer price index data, particularly the positive performance of the core PCE price index, has provided hope for reaching the Fed’s inflation goals. As always, investors should remain vigilant in the face of market volatility and unexpected shifts.

Phil Schwartz

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