PCE Inflation Data Meets Expectations

STOCK INDEX FUTURES

Stock index futures are higher following the release of PCE inflation data for August, which came in line with expectations. PCE inflation grew 0.3% in August and 2.7% year-over-year, while core PCE grew 0.2% in August and 2.9% on the year. Markets rallied following the release, as the figures suggest that although inflation is still above the Fed’s 2% target, it is not surging as initially feared, potentially clearing the path for the Fed to continue to cut rates at its October and December meetings. The report also showed that consumer spending in August rose 0.6% compared to a 0.5% rise in July, highlighting signs of resilience in the economy.

President Trump announced he would be placing a 100% tariff on imports of branded drugs, with the tariff applying to companies that are not already building a manufacturing plant in the US. The president offered no further details. Roughly nine out of 10 prescriptions in the US are filled with generic drugs, which wouldn’t be affected by a tariff on “branded or patented” products. The Trump administration placed a 15% tariff on most pharmaceuticals coming from the European Union, shielding those imports from the new levy.

The University of Michigan’s final consumer survey for September will be released later this morning for a snapshot of consumer sentiment in the country.

CURRENCY FUTURES

The USD index is lower following the release of PCE inflation figures that came in line with expectations. The data lead markets to increase expectations that the Fed will continue with its easing cycle and cut rates again in October and December. Fed Funds futures are pricing an 87.7% chance of a cut in October, up from 85.5% yesterday, while December contracts are pricing a 63.8% chance of a cut, up from 60.5% yesterday. The data comes after revised Q2 GDP figures and weekly jobless claims figures released on Thursday came in better than expected and led markets to scale back bets on interest rate cuts, which also sent the dollar higher. Fed Funds had priced a 92% of a Fed cut in October on Tuesday, signaling that overall expectations of rate cuts have been dimmed slightly due to the hot data from Thursday.

Euro futures are higher on a weaker dollar following the US inflation data release. On the trade front, President Trump announced a 100% tariff on branded or patented pharmaceutical products. The European Union secured a 15% ceiling on US tariffs for pharmaceuticals, shielding the trade bloc from the impact. Meanwhile, reports suggest the EC plans to impose tariffs of 25% to 50% on Chinese steel and related products in the coming weeks. Expectations point toward the end of the ECB’s easing cycle after the central bank left rates unchanged for a second straight meeting in September. Economic indicators continue to paint a mixed picture, with services PMIs showing signs of recovery while the manufacturing slump deepens.

British pound futures are higher as the dollar weakened. The pound has faced pressure from mounting concerns about the outlook for Britain’s long-term finances ahead of Finance Minister Rachel Reeves’ upcoming budget, which is expected to include tax hikes in an effort to balance Britain’s government finances. An unexpected surge in public borrowing in the country, paired with evidence of slowing momentum for British manufacturing and services and weak government debt auctions has created a volatile backdrop for the sterling. 10-year gilt yields rose 8.7 bps on Thursday, the biggest rise since early July, while the pound fell steeply. Rising yields and the falling sterling reflect waning confidence in the economy and doubts from investors that the government will keep its finances on track. Markets are pricing in just one 25 bps rate cut by the Bank of England by the end of 2026, reflecting persistent inflationary problems.

Japanese yen futures edged higher following the release of US and Tokyo inflation data. Tokyo consumer inflation figures showed that inflation held steady in the Tokyo metropolitan area in September. Tokyo consumer inflation, considered a leading indicator of inflation nationwide, showed prices grew 2.5% from a year earlier, matching the pace of price growth recorded in August and below expectations of a 2.8% rise. The yen weakened following the Tokyo data. The weaker-than-expected reading was owed largely to free day-care services rolled out by the Tokyo government in September. Japan’s nominal wages rose 3.4% year-on-year in July 2025, revised down from an initial estimate of a 4.1% gain. Real wages, adjusted for inflation and a key gauge of household purchasing power, fell 0.2% in July, compared with a preliminary reading of a 0.5% increase, marking the seventh consecutive month of decline. Real wage declines could suggest household purchasing power is eroding, which could dampen consumption and make inflation less sustainable. Wage growth is a key metric the BoJ watches to assess whether inflation is demand-driven and sticky enough to justify tightening. The summary of opinions from the September meeting is due next week. Evidence of little divergence in views between hawkish members of the policy board and other members could fuel expectations of an October rate hike from the BoJ. Minutes from the Bank of Japan’s July meeting showed that some policymakers called for resuming interest rate hikes in the future, even as the board decided unanimously to keep borrowing costs steady. At a subsequent meeting in September, two board members dissented from the BoJ’s decision to keep interest rates steady at 0.5%, instead calling unsuccessfully for a hike to 0.75%.

Australian dollar futures are little changed against the dollar. Investors are dialing back expectations for rate cuts in Australia after August’s inflation came in hotter than anticipated. Consumer prices rose 3.0% year-over-year, up from 2.8% in July and marking the highest reading since July 2024. The increase was largely driven by housing costs, which accelerated to 4.5% from 3.6%. However, the trimmed mean inflation, which excludes volatile components, edged down slightly to 2.6% from 2.7%. Despite the monthly uptick, policymakers at the Reserve Bank of Australia tend to prioritize quarterly data. Governor Michele Bullock indicated earlier in the week that inflation remains on track, suggesting the central bank is in no rush to ease policy.

INTEREST RATE MARKET FUTURES

August’s 12-month PCE price index rises to 2.7% from 2.6%, with core steady at 2.9%. The data follows a surprise upward revision to Q2 GDP yesterday, pointing to signs of economic strength and offering the Fed some leeway to be cautious about cutting rates.

Chicago Fed President Austan Goolsbee on Thursday cautioned against further interest-rate cuts while inflation is still above the central bank’s 2% target, especially with the labor market showing signs of only mild cooling. Goolsbee said that tariffs have not driven up inflation as much as feared, and their impact has mostly been confined to goods prices rather than pressuring prices more broadly, but he’s still worried they could.

Yields have drifted higher over the past week as markets have leaned into hawkish comments from Fed officials, including Chair Powell, who reiterated caution regarding the outlook for interest rates following last week’s rate cut. Also pushing yields higher has been a flood of corporate and government bonds. Oracle announced an $18 billion six-part senior note package earlier in the week. September bond supply will top well over $178 billion, a record recorded in September of last year.

Thursday’s seven-year note auction was sloppy. The auction fetched a bid-to-cover ratio of 2.40, below the six-auction average of 2.60. Indirect bids totaled 56.4%, below the 68.1% average, with direct bids totaling 31.6%, above the average of 22.2%, leaving dealers with an above-average 12.0% take vs. the average of 9.7%. This comes after Wednesday’s $70 billion five-year note auction, where results were sloppy with non-aggressive bidding and below-average non-dealer demand. Tuesday’s two-year note auction, where results were on par with recent averages.

The spread between the two- and 10-year yields fell to 51.5 bps from 53 bps on Thursday, while the 2-year yield, which reflects interest rate expectations, fell to 3.65%.

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