S&P 500: Sticky PCE Inflation Data Could Cap Fed's Policy Options This Fall

Core Insights - The 10-year yield is stable around 4.22%, while the 2-year yield is near 3.635%, indicating a cautious market awaiting key inflation data [1] - Economists anticipate a 0.2% increase in headline PCE and a 0.3% rise in core PCE, which would elevate the year-on-year core rate to 2.9%, marking the highest level since February [2] - The Federal Reserve is facing a dilemma as inflation remains firm, but job growth has slowed, shifting focus from inflation to employment concerns [3] Market Behavior - Market expectations for a rate cut in September are still present, but there is a pullback on how aggressive the Fed can be, especially if core PCE reaches 2.9% or higher [4] - Fed minutes from July indicated that a majority of officials viewed inflation risks as more pressing than job concerns, although recent soft labor data has influenced market perceptions towards a potential rate cut [5] - Economists are divided on the Fed's next steps, with some suggesting that political factors are complicating the decision-making process regarding rate cuts [6]