June PCE In Line With Expectations, Making September Rate Cut More Possible

The latest data shows that the U.S. core PCE price index rose by 0.2% month-on-month in June, in line with market expectations; it rose by 2.6% year-on-year, slightly exceeding the estimated 2.5% but was flat compared to the previous month.

In June, the price of goods fell by 0.2% month-on-month, while services increased by 0.2%. Housing-related prices in June rose by 0.3%, marking the smallest monthly increase since January 2023 and slowing down from the 0.4% increase each month in the past three months.

The report also indicated that personal income only grew by 0.2%, below the expected 0.4%. Expenditure increased by 0.3%, which was in line with previous forecasts.

This latest price index further confirms that inflation in the United States is indeed moving in the direction that the Federal Reserve desires. As the last major macroeconomic data before the Federal Reserve's July FOMC meeting, although it is unlikely to prompt the Federal Reserve's voting members to start a rate-cutting cycle this month, considering the entire second quarter PCE data released yesterday, the inflation that once again met the expected increase in June does make the possibility of a rate cut in September increasingly likely.

Currently, the probability of the Federal Reserve making its first rate cut of the year in September on FedWatch has risen to 90%.

After reaching a 40-year high in mid-2022, inflation has significantly eased. And after several better inflation readings in the second quarter, Federal Reserve Chairman Jerome Powell said earlier this month that the central bank's confidence in inflation moving sustainably towards 2% is growing stronger.

Powell said in a speech at the Economic Club in Washington, D.C. in mid-July: I would say we didn't gain any additional confidence in the first quarter, but the three readings in the second quarter ... do add somewhat to confidence.

It is worth noting that another measure of inflation, the Consumer Price Index (CPI), has also shown further signs of easing in recent months: in June, the CPI fell by 0.1%, marking the first time that consumer prices have fallen month-on-month since the pandemic.

At the same time, the labor market seems to be cooling—June's employment report showed that the unemployment rate ticked up slightly to 4.1%, and the Labor Department made significant downward revisions to the job gains in April and May. And next week, the U.S. government will also release the latest monthly employment report.

Overall, the June PCE figures are reassuring, and they significantly strengthen the market's expectations for a rate cut. Now, let's see what decision the Federal Reserve will make in September.