Hopes for Fed pivot sustain despite stubbornly high inflation reading

(Alliance News) - A US inflation reading on Friday offered somewhat of a mixed bag, but investors are still holding out on hope that the Federal Reserve will still soon slow the pace of its rate hikes.

According to the Bureau of Economic Analysis on Friday, the core personal consumption expenditures index, which excludes food and energy, shot up 5.1% year-on-year in September, quickening from a 4.9% hike in August.

Core PCE is the Fed's preferred inflationary measure.

Core PCE missed forecasts but the wider PCE reading did not miss the mark.

The wider personal consumption expenditures index increased by 6.2% year-on-year in September, unchanged from August's annual growth rate. The September figure came in ahead of expectations of a 5.8% climb.

"Although core PCE inflation rebounded to 5.1% in September and real consumption looks to have more momentum than previously thought, the Fed may still draw some encouragement from the more modest 1.2% gain in private wages and salaries in the third quarter, which adds to the evidence that wage growth has peaked," Capital Economics analyst Andrew Hunter commented.

US stocks took confidence from the data, rising in morning trade despite recent disappointment on the earnings front. The Dow Jones Industrial Average was up 1.3%, the S&P 500 up 0.8% and the Nasdaq Composite up 0.7%, despite a slew of tech sector quarterly earning let-downs.

The PCE reading comes recent data has suggested the US economy is slowing, strengthening the case for the Fed to take its foot of the gas when it comes to monetary policy tightening.

Capital Economics analyst Michael Pearce said: "The 2.6% annualised rise in third quarter GDP was a lot worse than it looked, with growth in underlying demand grinding to a near-halt. At the same time, there are mounting signs that economic weakness will soon feed through to disinflation in core services."

Still, Pearce expects the Fed to hike by 75 basis points next week. Analysts at Dutch bank ING agreed, but noted a slowdown thereafter may be on the cards.

Analysts at ING commented: "Market expectations are firmly behind a fourth consecutive 75bp interest rate hike from the Federal Reserve next week. The key story is whether the Fed opens the door to a slower pace thereafter or if the hawks' focus on core inflation momentum signals a fifth 75bp move in December

"A 50bp hike is predicted by a tiny minority of analysts, a view that got some traction following recent comments from a couple of doves on the committee about the perceived risks of over-tightening policy and creating an unnecessarily deep recession. However, the general view is that this is more of a story regarding the size of rate hikes at subsequent meetings. Still, it certainly dampened any talk of a 100bp rate rise. No analyst is forecasting such an outcome based on consensus survey responses, unlike at recent meetings."

In its September meeting, the Fed lifted interest rates by 75 basis points for the third time in a row. This took the target range for the federal funds rate to 3.00% to 3.25%.

The Fed is not the only central bank making a rates decision next week.

The Bank of England announces its latest monetary policy decision on Thursday. Markets similarly expect a 75bp hike from Threadneedle Street, though Dutch bank ING is not so sure.

"We think a 50bp increase is narrowly more likely. More importantly, we think the bank rate is unlikely to go above 4% next year. And that suggests that markets are overestimating the amount of tightening still to come," ING said.

By Eric Cunha; [email protected]

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