More data, please

Markets are currently fueled by nuance, as higher for longer eases into cautiously optimistic, with a slight lean more toward cautious than optimistic. 

To translate: after a tough month that saw U.S. Treasury yields sharply higher on concern about stubborn inflation, increasing Treasury borrowing needs and on-going Washington political wrangling, markets caught a break on the last day of the month from economic data that pointed toward easing inflation. The implicit result is a higher potential for an easing of Federal Reserve policy ahead.

The Fed’s preferred inflation measure, the personal consumption expenditures (PCE) core deflator, rose 3.9% year-over-year in August, down from 4.3% in July. Even better, the last three months core PCE rose only 2.2% on an annualized basis, creating the optimism that inflation may be returning to earth. The headline PCE measure actually rose from 3.4% to 3.5% over the last year, primarily due to the recent sharp rise in gasoline prices, which followed crude oil prices higher.

The Fed has loudly and often committed to a 2% inflation target, but markets have not been quite sure if that means actually hitting 2% or, as Fed Chair Powell recently stated, “moving down sustainably toward our objective.” More economic data and more Fed speak in coming days should help paint the economic picture.