PCE Clears the Path for a Rate Cut!
Good news for mortgage rates! Today’s September PCE Inflation Report—the Fed’s favorite gauge—came in cooler than expected. Core PCE dropped from 2.9% to 2.8%, just as predicted. This tame inflation data, combined with yesterday’s weak jobs report, has essentially cleared the way for the Fed to cut rates by 25 basis points next week. This is the strongest signal yet that the cost of borrowing is set to trend lower.
PCE Inflation: Cooler Than Expected
The Core PCE, which strips out volatile food and energy prices, rose just 0.2% monthly. The year-over-year rate decelerated from 2.9% to a cooler 2.8%. This small difference is significant for the market.
The big reason is shelter. Shelter inflation finally showed a very tame reading, similar to the CPI report. Rents rose only 0.2%, and Owners’ Equivalent Rent increased just 0.14%. This confirms that official inflation measures are now catching up to the real-time weakness seen in the rental market.
The Fed’s Path Is Now Clear
The one-two punch of yesterday’s weak jobs report, which showed 32,000 job losses in November, and today’s calm PCE data makes a December rate cut highly likely.
Survey data from the University of Michigan also shows that consumers are expecting cooler inflation. Both 1-year and 5-year inflation expectations fell to some of the lowest levels of the year. This gives the Fed additional confidence to cut.
The caveat is that while a cut is expected, the Fed’s statement, projections, and press conference may still include cautious or hawkish language regarding future moves.
Technical View & Strategy
Mortgage Bonds remain range-bound, holding between strong support at the 25 and 50-day Moving Averages and overhead resistance at 101.32. The 10-year Treasury yield continues to battle resistance at the 4.126% Fibonacci level.
This sideways trading is expected to continue until the Fed meeting concludes next week.
Strategy: Continue floating. The odds favor a positive outcome that could push rates lower.
The Federal Reserve’s rate decision and economic projections will be released next Wednesday, December 10th at 2:00 PM ET, followed by the press conference at 2:30 PM ET.
