28 November 2024 - U.S. markets face a pivotal moment as inflation heats up, with core PCE hitting 2.8%. Despite robust 2.8% GDP growth, rising unemployment benefits and Trump 2.0 speculation are reshaping the economic battlefield. Is another Fed policy shift on the horizon?
Fed’s Preferred Inflation Gauge: Core PCE Rises to 2.8%
Critical economic data were monitored on Wednesday ahead of the Thanksgiving holiday in the U.S. markets. As traders continued to assess the potential economic impacts of a Trump 2.0 administration, they also sought clues about the Federal Reserve's policy trajectory.
According to a report published by the U.S. Bureau of Economic Analysis (BEA), the Fed’s preferred inflation gauge accelerated in October compared to the same month last year. The Personal Consumption Expenditures (PCE) Price Index rose 2.3% year-over-year, surpassing the previous figure of 2.1%.
While goods prices fell by 1.0%, services prices increased by 3.9%. The rise in services prices was primarily driven by healthcare services and housing. The decline in goods prices, on the other hand, was attributed to lower gasoline and energy costs. Food prices recorded a 1.0% increase, while the energy index dropped by 5.9%.
The so-called core PCE index, which excludes the volatile food and energy costs, rose 0.3% from the previous month. On an annual basis, the increase accelerated to 2.8%, up from the previous 2.7%.
Data providing insight into the potential trajectory of inflation, such as personal income and personal spending, also exceeded expectations in October. Income rose by 0.6%, compared to the previous 0.3%, while personal spending increased by 0.4%, surpassing the 0.3% forecast but down from the revised 0.6% in the prior month. The growth in income supported expectations of higher consumer spending in the months ahead.
US Economy Grows by 2.8%: Third Quarter Analysis
A report released on the same day showed that, according to the BEA’s second estimate, the gross domestic product (GDP) grew by 2.8% in the third quarter, matching the advance estimate. The increase in real GDP primarily reflected growth in consumer spending, exports, federal government spending, and nonresidential fixed investments.
When compared to the 3.0% growth in the second quarter, the decline largely reflected a drop in private inventory investments and a sharper decline in residential fixed investments.
Meanwhile, imports, which are subtracted in GDP calculations, increased during the third quarter. The figures indicate that net exports reduced the growth rate by 0.57 percentage points. Economists suggest that the trade deficit in goods may have widened due to stockpiling of imports in anticipation of new tariffs expected next year. Therefore, this deficit could deepen further in the coming period.
Jobless Claims Steady at 213,000, But Continuing Claims Hit 2021 High
Another drop in Wednesday’s data deluge came from the US Labor Department's weekly jobless claims report. Data for the week ending November 22 showed claims holding steady at a historically low level, coming in at 213,000 compared to economists’ median forecast of 217,000.
In contrast, a measure of continuing claims, which reflects the number of people receiving unemployment benefits, rose to 1.91 million, marking the highest level since 2021. Overall, these figures suggest that while there has been no significant uptick in layoffs in the US, those who are unemployed are finding it increasingly difficult to secure new jobs.
Moreover, a report released on the same day by the US Bureau of Labor Statistics supports this outlook. According to the report, nonfarm payroll employment increased year-over-year in 32 metropolitan areas in October, declined in 1 area, and remained virtually unchanged in 356 areas.
Wrapping Up: A Resilient Economy Amid Uncertainty
In conclusion, the incoming data points to a resilient US economy and a reduced risk of recession. Despite cooling down, the labor market remains robust, and when considered alongside sticky inflation data, it justifies the Fed policymakers' cautious approach to easing policy.
Market observers anticipate higher inflation and fewer Fed rate cuts next year, while Trump’s policy actions have the potential to complicate the economic agenda. Political uncertainty, coupled with inflation expectations, is likely to continue supporting the strength of the US dollar.
Additionally, emerging market currencies are expected to remain under pressure against the US dollar. However, projections for US stock market and precious metals remain positive.
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