US core PCE inflation cools to 3.0% as markets trim bets on October Fed rate hike

Commerce Department reports 3.0% core PCE inflation

The United States Commerce Department reported on Wednesday that the core personal consumption expenditures price index rose 3.0% from a year earlier. The inflation reading came in cooler than expected, confirming that price increases tempered across the country during August. The deceleration in the personal consumption expenditures metric arrived alongside evidence of an economy expanding at a solid clip throughout the second quarter. That quarterly growth was driven primarily by robust consumer spending across households and substantial business investment directed into the buildout of artificial intelligence infrastructure. Even with the moderation observed in the August reading, economists warn that price pressures could persist rather than ease further. Reuters US Economics Editor Dan Burns indicated that near-term improvements in the inflation trajectory remain doubtful.

it's probably not going to get better in the near term

Traders slash bets on October Federal Reserve rate hike

Following the Commerce Department release, financial market participants rapidly pared back expectations that the Federal Reserve will raise interest rates at its upcoming meeting in October. The core personal consumption expenditures price index represents the central bank's preferred measure of inflation, and its smaller-than-anticipated acceleration altered policy forecasts. Investors moved their baseline outlook to reflect a less than 50% chance of an October rate increase by monetary officials. Pricing derived from interest-rate swaps showed traders on Wednesday calculating approximately a 36% probability of a rate boost. Broader market measures priced in 43% odds of a quarter-point rate increase, representing a sharp pullback from probabilities above 70% recorded earlier in the week. The market reassessment gained momentum following remarks from New York Fed President John Williams regarding the rate path.

Treasury yields choppy as short-term rates slip

The cooler-than-expected inflation data provided noticeable support to United States Treasurys during trading on Wednesday. Short-term government bond yields slipped as investors scaled back their expectations for near-term interest rate increases from the central bank. In contrast, longer-term Treasury yields held fairly steady throughout the trading session, reflecting steady second-quarter economic expansion and persistent corporate spending. The divergence between short-term maturities and long-term debt produced choppy yield movements across fixed-income trading desks. Market participants balanced the relief of August's easing core inflation against the ongoing economic momentum generated by robust consumer activity and artificial intelligence infrastructure investments.

Diesel market constraints pose risk to inflation outlook

Despite the tempering of inflation in August, developments in the global energy market threaten to reverse recent progress, with diesel fuel standing as a primary risk. High diesel prices continue to place strain on global supply chains and have raised concerns about a potential United States diesel export ban. Refining networks show sharp geographical divergences in utilization. United States oil refineries are operating at 97% of maximum output, leaving little redundant capacity to boost domestic fuel supplies. Meanwhile, Chinese refineries are running at only 75% of maximum capacity, maintaining significant surplus capability after China helped keep a lid on crude oil prices earlier this year by cutting its crude imports. In theory, China has the capacity to deliver substantial diesel volumes to the international market and cool elevated prices. However, Beijing's ability to ease global diesel price pressures remains limited in practice.