PCE Data Offers Little Surprises

STOCK INDEX FUTURES

Stock index futures are lower but found some support following PCE inflation data that came in line with expectations. PCE inflation grew 0.2% in July, while core prices rose 0.3%. The data being in line with expectations adds further weight to the August labor report next week for further clues as to how the Fed will move in September. Markets are pricing an 87% chance of a cut in September, up from 85% earlier in the morning before the release.

On the tariff front, a federal appeals court is expected to rule soon on whether President Trump’s use of emergency powers to impose sweeping tariffs is legally valid. A lower court previously ruled that Trump lacked authority under the 1977 International Emergency Economic Powers Act (IEEPA), which doesn’t mention tariffs, and many analysts expect the appeals court to uphold that decision. If the court strikes down the tariffs, Trump will likely appeal to the Supreme Court, but the ruling could still force a major overhaul of his trade strategy. The Fed may also need to factor in the economic impact of a sudden tariff reversal when considering interest rate decisions this fall.

Second quarter GDP was revised up by 0.3% from 3.0% to 3.3% by a decrease in imports, which are subtracted in GDP calculations, and a pickup in consumer spending, though it was partially offset by declines in investment and exports. Real final sales to private domestic purchasers, a key measure of underlying domestic demand, rose 1.9%, up from the previous estimate of 1.2%. On the income side, real gross domestic income (GDI) surged 4.8%, and the average of GDP and GDI rose 4.0%, signaling broad-based economic strength. Corporate profits also rebounded, increasing by $65.5 billion after a sharp decline in the first quarter.

The University of Michigan’s final consumer survey for August is due later this morning at 9:00 a.m. CT.

CURRENCY FUTURES

The USD index is higher but faced downward pressure following the PCE inflation data that came in line with expectations. Personal income also came in line with expectations, rising 0.4% in July, driven mainly by higher compensation, especially in service-producing industries. August’s labor report next week will be a pivotal factor in determining where the Fed will move with interest in September. Given that PCE inflation met expectations, it is likely the Fed will move to cut rates. The dollar has also remained under pressure from President Trump’s efforts to remove Fed Governor Lisa Cook and, if successful, replace her with a more dovish-leaning candidate. Markets are currently pricing in an 87% chance of a 25 bps cut at the September meeting.

Euro futures are lower after US PCE inflation data offered no surprises and after inflation figures in several Eurozone economies showed weakness. Inflation in France, Italy, and Spain held steady in August and showed no signs of picking up, while it ticked up slightly in Germany. CPI inflation grew 0.1% in Germany in August, above forecasts of no growth, which landed the annualized rate at 2.2%, above the expected 2.1%. The increase was due in part to higher good prices and a smaller drop in energy prices. Core inflation remained at 2.7%. French HICP (harmonized to European standards) grew just 0.5% in August and stood at 0.8% on an annualized basis. In Italy and Spain, annual inflation held steady this month at 1.7% and 2.7%, respectively. The continued easing in prices out of the largest economies in the eurozone will help take annual inflation further below the 2% target level, creating a chance, albeit small, for the European Central Bank to cut rates again at its September meeting. Markets expect the ECB to keep holding its key deposit rate at 2.0% at September’s meeting. The recent strengthening of the euro, which is expected to continue into the future, has reduced the competitiveness of European goods on the global market. The stronger euro, along with newly imposed US tariffs, is likely to hurt growth for the trade bloc, especially for export-focused Germany, as its European neighbors will be unable to pick up the hit to demand from the American market. The German economy shrank by 0.3% over the second quarter and showed signs of further strain. Retail sales in the country shrank 1.5% in July, while the number of unemployed people in the country crept over three million in August, figures that will likely continue to put downward pressure on prices. Meanwhile, French household spending fell in July, shrinking 0.3% in August, albeit in line with expectations. France’s economy also grew at a robust 0.3% pace in the second quarter. A minority government currently led by Prime Minister Francois Bayrou faces a confidence vote early next month, which it is expected to lose, creating further headwinds for the county’s gaping budget deficit.

British pound futures are lower, falling on fiscal worries after the Institute for Public Policy Research urged a windfall tax on banks profiting from reserves at the Bank of England. Analysts warn fiscal policy could weigh further on sterling, with Chancellor Rachel Reeves expected to raise taxes again. Bank of England MPC member Catherine Mann signaled support for keeping rates steady for an extended period but remains open to sharp cuts if growth deteriorates. She warned that wage growth remains too high to support a return to the 2% inflation target, though she opposes further tightening given the UK’s fragile economic outlook. The UK’s challenging fiscal environment could open the door for more rate cuts this year if economic conditions worsen. However, money markets now see only around a 36% probability of a quarter-point reduction this year, and the next cut is likely priced in for spring 2026. This comes after a hot inflation print last week, which saw inflation rise to 3.8%, although many of the price pressures are expected to be one-off. Still, the inflation remains well above the Bank of England’s target, and in its most recent policy meeting, policymakers signaled they were more concerned with rising inflation than they were with supporting the economy.

Japanese yen futures are lower after Tokyo inflation figures came in line with expectations, with Tokyo core CPI giving a reading of 2.5%, above the Bank of Japan’s 2% target and down from a previous recording of 2.9%. Industrial production in the country declined 1.6% in July, below expectations of a 1.1% drop, while retail sales in the country shrank 1.6% during the same period as well, also falling below expectations. At the same time, the unemployment rate eased to 2.3% from 2.5% in June, pointing to continued labor market strength. The mixed data suggests that conditions for a rate hike from the BoJ are not yet in place. BoJ Governor Kazuo Ueda recently stated that wages are expected to rise further amid tightening labor conditions, reinforcing expectations that another rate hike is gradually coming into view. Expectations of a rate hike have grown in recent days despite a lack of direction from the data; Japanese government bond yields have risen, and the yield on the 30-year bond reached 3.24% on Wednesday, an all time high.

Australian dollar futures edged lower following US PCE inflation data. Private new capital expenditures grew below expectations in the second quarter at a 0.2% rate, below forecasts of 0.8%. Domestic inflation figures showed an annual increase of 2.8% in July, up from 1.9% in June and far above the median forecast of 2.3%. Part of the jump was due to the timing of electricity rebates, which would unwind in August and likely pull the index down again. However, the trimmed mean measure of core inflation also rose sharply to 2.7%, from 2.1%, and that excluded electricity. Despite the high reading, the measure is only a partial read on inflation, and the Reserve Bank of Australia is likely to wait until Q3 inflation before making any policy changes. Minutes from the central bank’s August meeting suggested that further reductions in the cash rate are likely over the coming year, with the pace and timing dependent on upcoming data and global risks. Markets price around a 93% chance of a quarter-point cut to 3.35% in November.

INTEREST RATE MARKET FUTURES

Futures are lower across the curve but found some support after July’s PCE inflation data offered no surprises. PCE price index rose 0.2% month-over-month, a slight cooling from June’s 0.3% increase, with goods prices falling 0.1% and services prices rising 0.3%. Core PCE inflation remained steady at 0.3% monthly but ticked up to 2.9% year-over-year—the highest in five months—suggesting persistent underlying inflation pressure remain. The steady monthly core inflation and uptick in the annual rate could reinforce expectations that the Fed will remain cautious about cutting rates too soon. However, given Powell’s comments last week, it is likely the Fed will move to cut rates soon in the near future at its September or October meeting. The inflation reading adds even more importance to August’s labor market figures due next week for further clues as to how the Fed will move in September and to the extent of easing the economy will see from the bank before year end.

Fed Governor Waller reiterated his support for a 25 basis point rate cut at the upcoming September meeting during a speech he gave at the Economic Club of Miami on Thursday. Waller argued that policy should move toward a neutral stance, which he estimates to be 125–150 basis points below the current rate. He emphasized that waiting for further labor market deterioration before cutting rates would be a mistake, especially given the current data. He pushed back against arguments that declining labor supply explains the weak jobs data, stating, “Supply-side changes can’t account for the ugly jobs numbers of the past three months.” Instead, Waller pointed to signs of declining labor demand such as rising unemployment among cyclically sensitive groups like teenagers, businesses’ hesitancy to hire, and a drop in the quit rate. On inflation, Waller advised policymakers to “look through” the effects of tariffs, assuming their impact will be shared across importers, exporters, and consumers. Waller’s speech was not only a policy statement but also a strategic positioning as a potential successor to Chair Powell.

The release of stronger-than-expected Q2 GDP data, showing a 3.3% annualized growth rate and upward revision to consumer spending, led markets to anticipate a more hawkish stance from the Federal Reserve. This pushed short-term Treasury yields higher, reflecting expectations of tighter monetary policy or a prolonged period of elevated interest rates. At the same time, longer-term yields declined as investors weighed signs of weakening investment and exports, moderating inflation, and the potential for slower growth ahead, suggesting a more cautious long-term outlook and possible future easing.

Concerns over the removal of Governor Lisa Cook have been evident in Treasury yields, with markets expecting a board with a more dovish tilt. The prospect of monetary policy that could be looser than necessary has raised concerns that the board could lose its grip on inflation, which in recent days has sent short-term yields lower and longer-term yields higher as inflation expectations increase. The closely watched yield curve comparing two- and 10-year Treasury yields steepened to its highest since April intraday on Tuesday, while the premium of 30-year yields over two-year yields surged to its highest since early 2022.

The spread between the two- and 10-year yields rose to 58.9 bps from 58.8 bps on Thursday.

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