Core PCE Inflation Falls Below Expectation

We keep the multi-car train of economic reports moving this morning, following an eventful yesterday that saw indices jump on Fed Chair Jay Powell’s assertion that the end is nigh for 75 basis-point (bps) interest rate hikes. Private-sector jobs from Wednesday’s ADP ADP report were lighter than expected, while Q3 GDP was revised up 20 bps to +2.9%. Both job openings and job quits were down slightly in the JOLTS report. Basically, a still-strong economy is shrinking some of its inflation bloat, and the Fed Chair has taken note of this.

Thus, market indices rose robustly, closing at session highs +2.2% (Dow), +3.1% (S&P 500) and +4.4% (Nasdaq) — it was the epitome of a relief rally. And we keep that train moving this morning, as I say above, with more data to take into account two weeks ahead of the next Fed meeting: jobless claims, prices and consumer expenditures all are out this morning.

Initial Jobless Claims for last week sank to 225K, below the 235K expected and a slight upward revision to the previous week’s 241K. This is back to roughly the median weekly new claims total over the past 10 weeks (prior to that, the median was closer to 200K). With monthly job tallies starting to diminish, at least on the private-sector side so far, coming down in weekly claims is a bit of a surprise. However, it also re-establishes the health of the overall labor market post-pandemic.

Continuing Claims are reported a week behind initial claims, and this morning they tell a slightly different story: 1.608 million is the highest number of the 12-week cycle by a lot, following the second-highest 1.551 million the previous week. This is more in-line with what we’re starting to see on the monthly jobs totals, although tomorrow’s non-farm payrolls from the U.S. Bureau of Labor Statistics might have something to say about this Friday morning.

The big economic news this morning comes from the Personal Consumption Expenditures (PCE) Price Index for October — among the most comprehensive guides for recent-past inflation effects on pricing power. Headline +0.3% was the same as the prior month, which is welcome steadiness after months of topsy-turvy headline PCE data (-0.1% in July, +0.6% in May). Stripping out food and gas prices, the “core” print brings us to +0.2%, 10 bps below expectations and markedly lower than the +0.5% reported for September.

Year over year, headline PCE dropped 20 bps from the previous month to +6.0% — more of the gradual declines we’re seeing in other inflation metrics — likewise on core year over year: +5.0%, down 10 bps from September. We were seeing core figures stubbornly ticking up over the past few months, and core reads are usually laggards among economic trajectories, so we count this as another check-mark that Chairman Powell can tick off on the Fed’s way to scaling back rate hikes.

Real Disposable Income grew surprisingly in October, +0.4% from 0.0% the previous month. Real Consumer Spending reached +0.5%, 20 bps higher than projected. While we are mindful to point out these numbers are from October — pre-holiday shopping season — this news may yet be favorable to retailers for the last quarter of the year. It also demonstrates the resiliency of the American economy writ large, which may embolden market participants to build on the perceived strength of potentially avoiding a recession in 2023

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