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Core PCE Inflation Rate Slowest Since September 2021

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The big Personal Consumption Expenditures (PCE) report came out this morning, largely in-line with expectations with a couple exceptions. Headline month-over-month PCE for August was as expected at +0.4%, double the previous two months of +0.2%, largely on higher fuel prices in particular pockets of the economy. It’s the highest print, in face, since +0.7% was reported in January of this year.

Personal Spending also came in at +0.4%, as expected, and half the +0.8% reported the previous month. This is the lowest read since May. Real Spending reached just +0.1% last month — another sign of higher fuel (and food) prices taking a bite out of consumer spending. Year over year PCE on headline came in at +3.5%, 20 basis points (bps) higher than expected and the loftiest print since May. It5 comes off an upwardly revised +3.4% the previous month.

Obviously, food and energy costs are important. They are perhaps the most noticeable of all price points for the average consumer. However, due to their month over month potential volatility, it’s the core print — stripping out food and energy costs — that the Fed really pays close attention to. Month over month, core PCE came in at +0.1%, lower than the +0.1% expected. Core PCE year over year — the key metric in determining inflation levels — reached sub-4% for the first time in two years, and just as expected: +3.9%. The July core PCE year over year bumped up 10 bps to +4.3%.

Advance Trade in Goods posted a much slimmer deficit month over month this morning: -$84.2 billion in August is among the trimmest deficits we’ve seen this past 12 months, and well off the pair of -$97.5 billions we saw earlier in this cycle. In early 2022 we actually dipped below -$12 billion for an all-time record deficit. It’s nice to see this being worked down.

Advance Retail Inventories last month were way up to +1.1% from +0.2% in July; Advance Wholesale Inventories came in at -0.1% from -0.2% the previous month. We see here how equilibrium remains difficult to attain, and that differentiating these metrics can help give a clearer picture for inventories, which was one of the key reasons inflation spiked in 2021 and 2022. After today’s open, we’ll get Consumer Sentiment for September, expected in-line at 67.7.

In all, the pre-markets are happy with these numbers. It doesn’t exactly cancel out the notion that the Fed has one more 25 bps rate hike in them before the end of the year — either at the November or December meeting (there is no meeting in October). Still, the news demonstrates progress, so the oversold market is currently filling in some gaps: the Dow is +170 points at this hour, the S&P 500 +25 and the Nasdaq +130 points. Should this continue, we just might finish this trading week in the green.

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