Cool PCE, Slowing Job Data Spurs Rate Cut Expectations, 10- year at 4.29%    

Last Friday’s PCE report was a welcome “cooling” sign to markets. Monthly PCE increased 0.3% with the closely watched core up 0.2%, the lowest numbers since December. This hopefully confirms that the January-February PCE and CPI “hot” spikes were distorted due to year end anomalies. This puts annualized figures in the 2.5% range (still above the Fed’s 2% target).  

Speaking of the Fed and the 2% target, last week the Cleveland Fed issued a report indicating that the “final battle” to push inflation down from about 2.5% to 2.0% could take 3 years (see chart below). They point out that many of the Covid era inflation factors (supply chain disruption, massive stimulus) have been mitigated. This adds to the “long slog” narrative as the final push from about 2.5 to 2.0% will be incremental and slow. But let’s not forget that the Fed has a “dual mandate”, low inflation and low unemployment. So, the next rate cut scenario will most likely be spurred by weakening employment numbers and “almost there” price increase levels. This week’s jobs numbers (lower job creation, higher jobless claims) are stoking rate cut expectations. The 10-year Treasury is down 30 bps. Tomorrow, the big monthly jobs report. Next Wednesday, CPI and Fed meeting. Stay tuned… 

By David R. Pascale, Jr., Senior Vice President at George Smith Partners.