PCE inflation nears to Fed's target

The PCE price index rose by 0.1% m/m in the US in August, in line with expectations and much cooler than a 0.4% m/m rise recorded a month earlier. On an annual basis, the PCE price index rose by 2.2% in August, slower than the 2.5% recorded a month earlier and close to the Fed’s target level of 2%. The core prices index was up by 0.1% m/m in August while on an annual basis it rose by 2.7% in August, slightly faster than a month earlier. While the cooling inflation will be a welcome signal to the Fed, personal spending data was more worrisome. Personal spending adjusted for inflation rose by just 0.1% m/m in August, much slower than the 0.4% recorded in July. The rates trajectory will be set in the near term by a speech from Fed chair Jerome Powell on Monday and the release of the September non-farm payrolls at the end of the week.

The final estimate of the University of Michigan consumer sentiment survey was slightly better than the initial release at 70.1 for September, up from 69 a month earlier. There were upgrades to both the current conditions and expectations components. Year-ahead inflation is expected at 2.7% while longer-run inflation is expected to level off at 3.1%.

Inflation in France dropped substantially in September according to a flash estimate of consumer prices. Headline CPI fell by 1.2% m/m as prices cooled from the summer when activity in the French economy was bolstered by Paris Olympic games. On an annual basis, inflation in France fell to 1.5% in September from more than 2% a month earlier. Inflation from across the Eurozone will be released later this week which is expected to show prices falling below the target level of 2%.

Türkiye will introduce a 10% minimum on corporate tax in 2025 to expand revenue gathering for the government. Corporate real estate sales will no longer be tax exempt. Consensus expectations for the country’s fiscal balance are for an improvement in 2025 to a deficit of 3.8% of GDP compared with more than a 5% deficit expected for this year.

China’s PMI numbers for September remained soft, highlighting the need for the government to support growth with stimulus. The official manufacturing PMI printed at 49.8 while the non-manufacturing fell to 50 from 50.3 in August. Private sector measures were also soft with the Caixin manufacturing PMI dropping to 49.3 from 50.4 a month earlier while the services PMI from the private sector managed to stay above 50 but fell to 50.3 in September from 51.6 a month earlier.

Today’s Economic Data and Events

• 16:00 GE CPI y/y Sept: forecast 1.7% y/y
• 18:30 US Dallas Fed manufacturing activity Sept: forecast -10.3

Fixed Income

• PCE inflation in line with market expectations along with soft consumer spending data helped to lift US Treasuries at the end of the week. Yields on the 2yr fell by almost 7bp to 3.5592% while the 10yr yield was lower by about 5bps to 3.7506%. The 2s10s curve steepened by about 2bps to almost 19bps at the end of the week.
• Markets ended last week with about 38bps of cuts priced in for the November FOMC and slightly more than 75bps by the end of the year. Alberto Musalem, president of the St Louis Fed, said the Fed should make “policy gradually less restrictive” while also noting he supported the 50bps cut that started the Fed’s easing cycle.
• Credit markets generally got a lift at the end of the week with Treasuries leading the way. Emerging market and high-yield bonds closed higher.
• Moody’s affirmed their ‘Ba1’ rating on Morocco with a stable rating while S&P upgraded Oman’s sovereign rating to ‘BBB-‘, the first step of investment grade and put the rating on a stable outlook. S&P noted improvements in the government’s fiscal stance to support the upgrade.

FX

• The US dollar was broadly weaker at the end of the week as markets looked to the PCE numbers as supportive of more rate cuts from the Fed. The broad dollar index was lower by 0.2% on Friday, mostly as a result of USDJPY selling off by 1.8% to 142.21. Among other peers, the dollar was actually stronger: EURUSD fell by 0.1% to 1.1162 while GBPUSD dropped by 0.3% to 1.3374.
• Among commodity currencies USDCAD rallied by 0.4% as markets price in more downside for oil markets. The Loonie closed at 1.3516 against the US dollar. Elsewhere both AUDUSD and NZDUSD managed gains of 0.1% and 0.2% respectively.

Equities

• Global equity markets had a mixed close on Friday. US markets were generally weaker with the S&P 500 down 0.1% and the NASDAQ off by 0.4% while the Russel 1000 fell 0.1%. European markets though were much stronger with a 0.7% gain in the EuroStoxx 50 index and the FTSE up by 0.4%.
• Asian markets rallied strongly on Friday as they reflected investor optimism around China’s support measures, particularly for financial markets. The Hang Seng gained 3.6% while the Nikkei added 2.3%. Chinese markets rallied even more.

Commodities

• Oil markets managed to close Friday in the green with Brent futures up 0.5% at USD 71.98/b and WTI up by 0.8% at USD 68.18/b. However, for the week as a whole prices were off by 3.4% in the Brent market and more than 5% in WTI. The weakness spread across refined product markets as well with gasoline and diesel futures also dropping last week.
• Fears of geopolitical escalation after Israeli attacks on Lebanon will add some risk premia to oil prices though markets are still expecting to see a large stockbuild develop next year that will be a major heading for oil.
• Investor positioning toward oil remains downbeat though the net short in Brent futures and options turned marginally positive last week. The long-short ratio is barely above 1 while in WTI sentiment is slightly better.