Today’s release of June PCE data (the Fed’s preferred inflation gauge) indicated 0.2% increase in monthly core and 2.6% in annual core. These numbers were right at expectations and firmed up expectations for a September rate cut. Futures markets indicate a 100% probability of a rate cut by September (that includes a 12% probability of 50 bps in cuts by September). Goods prices were down 0.2% for the month with services up 0.2%. Significantly, “housing related” aka shelter costs dropped to a 0.3% monthly increase after 3 straight months of 0.4%.

“Are We There Yet?” Three-month annualized PCE and Core PCE excluding the lagging housing component are both under 2.00% (see chart below). The report acted as a “permission slip” for Fed officials considering rate cuts and equity markets rallied with the Dow up 800 points. Ex Fed President Bill Dudley, after advocating for “higher for longer” throughout 2023 and into this year, now is convinced that September may be too late and is pushing for a July rate cut. Mr. Dudley’s op-ed in Bloomberg points to the “K shaped’ recovery: wealthy households consuming due to high stock and home valuations while the less wealthy struggle. He notes that the 3-month average unemployment rate is up 0.43% from its recent low, close to the 0.5% threshold known as the “Sahm rule” which would signal a recession (according to historical patterns). The Fed most likely won’t heed his advice as they will want to see more data and allow Fed Chair Powell to deliver his annual “big picture” remarks at Jackson Hole in August. Stay tuned…

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