Tame PCE Clears Path for Fed Rate Cut Next Week

Stocks and Mortgage Bonds are both lower to start the day, following a slightly tamer than expected PCE inflation report.

Personal Consumption Expenditures (PCE)

The Fed’s preferred inflation gauge, PCE, showed that headline or all-in inflation rose 0.3% in September, which was in line with estimates. Year over year, headline PCE rose from 2.7% to 2.8%, also as expected.

Core PCE, which excludes food and energy and is the main focus of the Fed, rose 0.2% in September, in line with estimates. Year over year, Core PCE decelerated from 2.9% to 2.8%, which was one tenth lower than estimates just as we had predicted yesterday.

Pressuring the headline a bit higher was a 3.6% rise in gasoline prices. Helping, especially the core, was a very tame shelter reading, similar to what we saw in the CPI Report. Shelter only rose 0.15%, with rents rising 0.2% and Owners’ Equivalent Rents rising 0.14%. Finally, we are starting to see shelter behave and come in as it should. The year-over-year reading for shelter is still hotter than real time indicators at 3.7%, but should slowly continue to catch up, especially with the weak rental figures we have been seeing.

The three-month core run rate fell from 2.9% to 2.6%, while the six-month run rate increased from 2.5% to 2.7%.

Going forward, the BEA has not announced when they will release the October report, but the replacement for Core is 0.3%...which means that we may be able to make additional progress and potentially see Core fall to 2.7% year over year. November and December, however, were very low readings from 2024 and it will be hard to make any progress.

We should be able to see some progress made in early 2026, as the January/February readings for 2025 that will be replaced were higher at 0.31% and 0.45% respectively.

Not only was the PCE inflation data tame, but the survey data from the University of Michigan also showed that consumers are expecting cooler inflation. While consumers likely do not have a good handle on the exact level of inflation, their expectations for 1-year inflation declined from 4.5% to 4.1%, which was the second lowest reading of the year. Their expectations for 5-year inflation fell from 3.4% to 3.2%, which is the lowest of the year.

Bottom line – Wednesday’s ADP report showing 32,000 job losses in November, along with today’s tame PCE report for September, clears the path for the Fed to cut rates next Wednesday by 25bp. It will be important to dig into the statement, summary of economic projections, and press conference, as it may be a hawkish cut.

News Next Week

Tuesday: JOLTS, Weekly ADP Employment Report, 10-year Auction

Wednesday: Mortgage Applications, Fed Statement/SEP/Press Conference

Thursday: Initial Jobless Claims

Technical Analysis

Mortgage Bonds are trading in a range between dual support at the 25 and 50-day Moving Averages and overhead resistance at 101.32.

The 10-year broke above its 25 and 50-day Moving Averages yesterday, but is now testing overhead resistance at the 4.126% Fibonacci level. We anticipate Bonds and Yields to trade somewhat sideways ahead of next week’s Fed meeting.