The Fed might take another step
Alexander Ovchinnikov
Sep 26, 2024Today, a key indicator of inflation in the US was published — the Personal Consumption Expenditures (PCE) deflator. According to the Bureau of Labor Statistics, the growth rate of the deflator slowed in August to 0.09% m/m compared to 0.15% the previous month. On an annual basis, the rate fell to 2.24% against 2.45% y/y in July.
The core index (excluding volatile food and energy prices) rose in August by 0.13% m/m compared to 0.16% in July. But on an annual basis, the rate stalled: 2.68% compared to 2.65% in July. This matched market expectations.
At the same time, the report showed that the growth rate of personal incomes in the US slowed to 0.2% m/m compared to 0.26% in July (on an annual basis, the growth rate slowed to 5.61% y/y compared to 5.87% in July). The dynamics of personal spending also showed a slowdown: 0.24% m/m compared to 0.52% in July, and on an annual basis, it is already 5.21% y/y compared to 5.30% in July.
Overall, the statistics are not bad. And since the Fed has already decided that inflation is defeated and it is necessary to focus on supporting the labor market, yes — the data released today fits into this framework. Do these figures increase the likelihood that the Fed will still cut the rate by the end of the year? The answer is also affirmative.
Why this matters
After the published data, there is no doubt that bond yields in the front part of the curve will decrease. One can also almost certainly expect that the slope of the curve and the difference between the yields of long and short bonds will increase.
But we cannot assert that long-term bonds will also decrease in yield. I admit that before the November elections, the yield on 10Y bonds may still decrease. However, after the elections (by the way, the next Fed meeting on November 6–7 will take place right after them), the program of either of the two presidential candidates should lead to an expansion of the budget deficit, and therefore, an increase in the supply of bonds on the curve. And it is very likely that the yield on long-term bonds will be under pressure.
