PCE Data Show Core Inflation Slowing in August, Resulting in a Decline in Treasury Yields

Friday morning witnessed a decline in yields spanning the 2- to 30-year Treasury bonds, primarily driven by recent data indicating a deceleration in core inflation, as measured by the Federal Reserve's preferred inflation gauge.

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Here's the yield status:

• The 2-year Treasury yield (BX:TMUBMUSD02Y) registered at 5.025%, marking a decrease of 4.6 basis points from the previous day's 5.071%. It's worth noting that yields exhibit an inverse relationship with bond prices.
• The 10-year Treasury yield (BX:TMUBMUSD10Y) stood at 4.524%, reflecting a decline of 7.2 basis points compared to the 4.596% recorded on Thursday afternoon.
• Meanwhile, the 30-year Treasury yield (BX:TMUBMUSD30Y) recorded a rate of 4.664%, indicating a decrease of 6.4 basis points from the late Thursday figure of 4.728%.

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The driving force behind these yield adjustments stems from the release of recent data on Friday, shedding light on inflation trends. According to this data, inflation, as measured by the Fed's favored indicator, the PCE (Personal Consumption Expenditures) price index, experienced a notable uptick of 0.4% in August. This surge, the most significant in seven months, was primarily attributed to rising gas prices. Over the past year, this increase pushed inflation to 3.5%, up from the previous 3.4%.

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However, when volatile factors such as food and energy costs were excluded, the core inflation rate, which holds particular significance for policy makers, showed a more modest increase of 0.1% for the month. Moreover, the year-over-year growth in core prices decelerated from 4.3% to 3.9%, marking the slowest 12-month pace in nearly two years.

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While the inflation report provided valuable insights, it did not substantially alter market expectations regarding potential interest rate hikes by the Federal Reserve before year-end. Currently, Fed funds futures traders see an 86.7% probability of no action in November, which would maintain the Fed's primary interest rate target within the range of 5.25% to 5.5%, according to the CME FedWatch Tool. Additionally, the likelihood of no rate hike in December is estimated at 68.8%.

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In separate economic data, the nation's trade deficit in goods exhibited a decline of 7.3% in August, amounting to $84.3 billion, as compared to the prior month's figure of $90.9 billion.

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