Core PCE Inflation
PCE inflation followed the playbook of CPI inflation by disappointing with a higher-than-forecast print. Analysts were expecting a reading of 4.7%. Investors took it in stride this time, with minimal market reaction apparent.
Stocks tried to rally but ended the week lower. PCE inflation was expected to be a big focus for investors, but the worse-than-expected core print of 4.9% did not seem to phase investors. The more significant news of the week was the challenges in the UK bond market.
- Newly installed UK Prime Minister Truss and her Chancellor of the Exchequer (the UK equivalent of the US Treasury Secretary) announced a £45B package of energy subsidies and tax cuts a week ago.
- The sizeable fiscal stimulus puts upward pressure on inflation at a time when the Bank of England (BOE) is fighting rising prices through rate increases and balance sheet reductions. In response, investors deduced that the BOE will have to raise rates even more and even faster.
- The details are a bit wonkier than we need to go into here. Suffice it to say… the bond market began to unravel, large pension funds were getting margin calls, the value of the British Pound almost fell below the US dollar, and the BOE had to pivot quickly from quantitative tightening (to fight inflation) to quantitative easing (to restore market order). Yikes!
- The moves by the BOE have helped restore some market confidence.
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