US 10-Year Yield Falls Below 4.5% After PCE Data: Markets Wrap

(Bloomberg) — The world’s biggest bond market extended this month’s rally after a cooldown in the Federal Reserve’s preferred inflation gauge reinforced hopes policymakers will have room to cut rates this year.

Most Read from Bloomberg

Wall Street breathed a sigh of relief after the so-called core personal consumption expenditures price gauge came in line with estimates, while posting the smallest gain this year. What’s more, spending unexpectedly dropped. For a data-dependent Fed, the report was seen by traders as “not quite as bad”, “slightly constructive” and “marginally dovish.”

That perception was clearly reflected on markets Friday.

Treasuries rose across the curve, with swaps continuing to signal at least one Fed cut this year. However, stocks gave up initial gains as concern about a consumer slowdown hitting earnings overshadowed bets on policy easing.

“While we don’t necessarily want to see a weakening consumer, softening retail spending should help stoke the flames for lower rates in the second half of 2024,” said Bret Kenwell at eToro. “We’re not there yet, but the inflation reports were a constructive first step.”

Treasury 10-year yields fell six basis points to 4.49%. The S&P 500 dropped to around 5,220, led by losses in its most-influential group: technology. The Nasdaq 100 fell aabout 1%. Dell Technologies Inc.’s first revenue increase since 2022 wasn’t enough to impress investors with high expectations for the company’s AI server business.

Wall Street Reacts to Inflation Data:

Markets see inflation on a slow, but steady path lower.

The question is still how much more the Fed needs in terms of slower inflation before initiating an easing cycle.

Overall, the April PCE report is marginally dovish and should not lead to any large moves in the market, nor any change in the anticipated rate cuts for 2024. We needed to see more progress in disinflation to argue for multiple rate cuts in 2024.

Good news, right? Not quite. April inflation was better than March; still not good enough.

Inflation progress in April was not yet good enough to start the clock on the three month-type downshift we think is needed for the Fed to cut.

Today’s reports are essentially favorable for lower Treasury yields and the dollar as the inflation data was favorable, and real spending growth was in negative territory.

The numbers came in exactly as expected. A data-dependent Fed probably does not learn much the past two days. But the markets continue reducing expectations for rate cuts on economic strength.

Investors have been hoping that the bout of inflation we saw early in the year would fade, and that seems to be playing out.

The PCE data confirms price increases aren’t as sticky as feared, keeping hopes of at least one rate cut on the table.

This could set markets up for a more confident tone heading into next week. Slowly but surely, the inflation saga is fading.

April PCE data was a welcome relief after a string of hotter than expected inflation data in Q1, with headline and core inflation coming in as expected.

So the overall inflation outlook looks good, with disinflation in the pipeline, and that likely keeps the Fed on track to cut twice this year starting in September.

Yields fell in response to the PCE data only because there was no surprise with the data in line. Maybe too with the slightly less than expected spending figure as REAL spending was down a touch.

Consumer spending in the first month of the new quarter slowed as real disposable incomes fell.

Businesses need to prepare for an environment where consumers are not splurging like they were last year.

Overall, the Fed will want more clarity on the inflation front. This inflation update will likely keep the Fed on hold in the near term.

As expected, the PCE deflator data suggest that, although not quite as bad as the first three months of the year, inflation was still running above target in April.

At the same time, however, the real spending data suggest that second-quarter consumption growth could be weaker than we previously expected.

The PCE Price Index didn’t show much progress on inflation — but it didn’t show any backsliding, either.

Investors will have to remain patient, though.

The Fed has suggested it will take more than one month of favorable data to confirm inflation is reliably moving lower again, so there’s still no reason to think a first rate cut will come any earlier than September.

The market has spent this year worried about inflation and there was a sigh of relief this morning when it wasn’t higher than expected.

We are in a be-careful-what-you-wish-for moment because if slowing consumer spending leads to lower inflation and the Fed is able to cut slowly as a result then that will be good for markets

However, if consumer spending – and the economy – slows too quickly then corporate profits and stock prices will go down much more quickly than the Fed will be able to cut rates, so we would be careful at this point.

We view today’s April PCE inflation report as slightly constructive.

We do believe that there is a Fed put back in place, if for some reason the Fed over tightens and creates a sharp slowdown in the economy.

Corporate Highlights:

Nordstrom Inc.’s loss in the most recent quarter was worse than expected in part because loyalty members accumulated more rewards than the department-store chain had anticipated.
Gap Inc. reported better-than-expected results and raised its outlook for the full year, showing the apparel retailer’s bid to rebuild the business is moving forward.
Hess Corp. shareholders approved the company’s proposal to be acquired by Chevron Corp. for $53 billion by a razor-thin majority of 51% of shares outstanding.
Hedge-fund manager Bill Ackman is selling a stake Pershing Square as a prelude to a planned initial public offering of his investment firm, according to a person familiar with the matter.
UBS Group AG completed the historic acquisition of its former rival Credit Suisse, marking a new chapter for the Swiss financial sector as the defunct bank’s legal existence has formally ended.

Some of the main moves in markets:

Stocks