We get the Fed's favored inflation gauge on Friday. The August core PCE reading is expected to come in under 4% (year-over-year) for the first time in two years. This measures the change in prices of goods and services that people have actually paid — not just a selling price. "Core," means excluding food and energy prices.
So, the expectation is for a break of the 4% level. The Fed wants to see this number at 2%.
What would it take to get there? And what would it take to get there by the time the market is pricing in the probability of a first rate cut?
It would take an average monthly change in core PCE (month-over-month) of just under 0.17% through the first half of next year.
That would bring the annual change in core PCE to 2% by July.
This seems unlikely unless there are deflationary pressures coming down the pike.
This view would argue that the Fed will probably do what they've told us they will do (i.e. raise one more time). At this point, with a tight job market, and an economy running around a 5% annualized pace, and the expectation (of another raise) already built-in, they don't have a lot of risk in pressing the brake a bit harder. Of course, this assumes they continue to clean up any mess that may reveal itself in the financial system, due to climbing market interest rates (i.e. intervention).
On that note, let's take a look at a couple of charts …
Here's the U.S. 10-year yield, trading above 4.5% today, and into the top of this channel …
More concerning than the level of U.S. rates, is the influence on the Euro zone interest rate market. Today, German yields traded to the highest levels since 2011 (when the European sovereign debt crisis was escalating). Spanish yields traded to nine-year highs. And the chart on Italian yields looks like this (a potential breakout) …
With the above in mind, given the recent history of central bank manipulation in these markets, we should expect them to maintain control of these extremely important (to global financial stability) government bond markets.