Sea Change Narrative Intact After Key US Inflation, Spending Data

Crucial personal spending and inflation data out of the US came in largely as expected on Thursday, leaving intact the narrative behind a November to remember for bonds.

Core PCE price growth was 0.2% on a MoM basis in October, the figures showed. That was in line with estimates. Note that the unrounded figure was 0.16345%. On a YoY basis, the measure rose 3.5%, matching consensus.

October thus marked the slowest pace of annual core price growth since April of 2021, when inflation took off in earnest in the US.

The YoY read on the headline price gauge was 3%. The index was unchanged in October from September.

The in-line update came during a week defined by the perception of a sea change in Fed rhetoric around the prospects for so-called “insurance cuts” in 2024. Chris Waller changed the game, even if he didn’t mean to.

Bonds are on track for one of their months since 2008. The Bloomberg Aggregate gauge is gunning for its best month since Reagan was president.

Thursday’s data also showed spending remained relatively resilient last month. Real spending rose 0.2% against estimates for a slight increase.

The combination of resilient spending and cooler inflation is a recipe for Goldilocks.

Jobless claims, which fell sharply in the week to November 18, rose modestly, to 218,000. Recall that the prior week’s drop counted as the second-largest in two years.

Although initial claims continue to vex recession calls, continuing claims resumed their climb in the week to November 18, Thursday’s update showed.

At 1.927 million, ongoing claims were the highest in two years.

Given the scope of the rates rally, I wouldn’t be terribly surprised if bonds and STIRS offered a muted reaction to Thursday’s data. But as noted here at the outset, the dovish narrative remains intact, particularly after a much cooler-than-expected read on euro-area inflation.

Markets suspect the first Fed cut will come in May, and see nearly 120bps of cuts by year-end 2024.


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