Markets Breathe a Sigh of Relief as Inflation Fears Ease
The latest inflation data has brought a welcome respite to markets, which were reeling from the Federal Reserve’s hawkish stance earlier this week. The Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation measure, grew by 2.4% in November 2024 on a year-over-year basis, falling short of economist forecasts of 2.5%.
A Slower Pace of Inflation
While the PCE index marked its second consecutive monthly increase, the growth rate slowed down to 0.1% on a monthly basis, decelerating from October’s 0.2%. Core PCE, which excludes volatile components like food and energy, held steady at 2.8% year-over-year, below expectations of 2.9%. On a monthly basis, core PCE growth slowed to 0.1%, down from the prior 0.3% and below expectations of 0.2%.
Consumer Spending Remains Resilient
In tandem with the inflation data, the report also showed that personal income rose 0.3% month-over-month in November, slowing from October’s 0.5% increase. Personal spending grew by 0.4%, slightly below forecasts but in line with October’s increase, signaling resilient consumer activity heading into the holiday season.
Fed’s Hawkish Stance Softens
The unexpectedly softer November PCE reading could provide relief after days of heightened market volatility triggered by the Federal Reserve’s meeting earlier this week. The Fed signaled a slower pace of rate cuts and raised its inflation projections for 2025 and beyond, reinforcing its hawkish stance. However, the latest data may prompt policymakers to reassess their stance.
Market Reaction
Prior to Friday’s data release, money markets had priced in 65 basis points of cumulative rate cuts for next year. The U.S. dollar index tumbled 0.3%, while futures on major U.S. indices trimmed premarket losses. Gold surged by 0.6% to $2,610 per ounce, and Bitcoin rebounded to above $95,000 levels, cutting daily losses to 2%.
A New Phase in Monetary Policy
Fed Chair Jerome Powell’s remarks earlier this week signaled caution against easing further as interest rates approach the neutral level. However, the latest inflation data may prompt a rethink. As markets navigate the complexities of monetary policy, one thing is clear – the path forward will be closely tied to inflation trends.
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