The US 10-year Treasury yield dropped five basis points to 4.35% over the past week, while the major equity indices were flat to up 2%. This is because recent economic data has reinforced market predictions that the Federal Reserve’s cycle of rate hikes is ending and that rate cuts will occur sooner than anticipated.
This week’s primary data point for markets was the Personal Consumption Expenditures (PCE) inflation report released on November 30. With the support of stable core goods prices and a slowdown in core services excluding housing to 3.9% p.a. from 4.3%, core PCE inflation fell to 3.5% p.a. from 3.7%. Headline inflation decreased from 3.4% to 3.0% p.a., with a 2.6% decline in energy prices acting as an extra drag.
According to the PCE data, real consumer expenditure increased by 0.2% in September, almost half the third quarter’s monthly growth rate. However, a slight cooling was anticipated following one-time increases in third-quarter expenditure spurred by films and concerts.
More money was spent on products than services, with automobile spending down by 0.3%. This is probably because of a combination of lower supply brought on by the now-ended UAW strikes and higher financing prices that reduced demand. The largest increase in spending was on petrol, which increased 2.9% from September to October as prices declined.
Even with OPEC+ extending its production cuts into early 2019 and increasing the cutbacks to about 2 million barrels per day, oil prices have been relatively stable during the past week. Because analysts anticipate increased production in the United States, Guyana, and Brazil, the impact on prices was minimal.
Markets are growing more certain that the Fed will decrease in response to data indicating inflation is decreasing, and the economy is somewhat cooling. The likelihood of a cut by March has risen from 20% to 45% only this week. Since late October, the market has been rising partly due to this change.