Bonds rallied following the release of June’s Personal Consumption Expenditure (PCE) price index, which showed signs of slowing inflation, according to the Bureau of Economic Analysis.
- This index, favored by the Federal Reserve as an inflation gauge, revealed consumer prices rising by 0.1% in June, slightly up from 0% in May but marking the second-best month of the year.
- The annual PCE index dipped to 2.5% in June, down from 2.6% in May, the lowest level since February.
Core PCE: Excluding volatile food and energy prices, the core PCE rose by 0.2% in June, an uptick from the 0.1% rise in May but still the second-best month this year.
- The annual core PCE held steady at 2.6%, marking a three-year low.
Economists’ accuracy: This month, economists accurately predicted both the PCE and core PCE figures for June. They also correctly forecasted personal spending, which increased by 0.3% in June, down from 0.4% in May and marking the third-lowest level in the last eight months.
Slowing Income: The only miss for economists was personal income, which rose by 0.2% in June, down from 0.4% in May and tying for the lowest level in the last eight months. Economists had projected a 0.4% increase.
Rate Drop: The slowing inflation data was welcomed by those hoping for lower interest rates. Typically, slower income growth leads to reduced consumer spending, which in turn helps to curb inflation. In response to the PCE report, the 10-year Treasury yield fell 5 basis points to just under 4.20%.
Looking Ahead: Despite the cooling inflation, Federal Reserve Chair Jerome Powell is unlikely to cut rates at next week’s meeting. However, a hotter-than-expected second quarter had some wondering if Powell could throw cold water on that idea. However, the combination of slowing inflation and income aligns with the Fed’s expectations before considering rate cuts.
