Hot Core PCE at 2.7% Pressures Fed, Delays Rate Cut Hopes

Core Inflation Beats Expectations, Pressuring Federal Reserve Path

The Federal Reserve’s preferred inflation gauge showed a hotter-than-expected print for May, complicating the central bank’s rate path while testing traders’ expectations for easing. According to the Commerce Department, the core personal consumption expenditures (PCE) price index rose to 2.7% year-over-year, moving further away from the Fed’s 2% target.

Fed’s Preferred Gauge: Core PCE Hits 2.7%

Core PCE, excluding food and energy, climbed 0.2% for the month, slightly above consensus estimates, while the headline PCE index rose 0.1%. The annual rise in core prices to 2.7% underscores persistent services inflation, forcing traders to recalibrate expectations for rate cuts this year. The report indicates continued consumer spending pressures, with services inflation holding while goods prices remain relatively stable.

Personal Income Declines, Spending Slows

Personal income fell by 0.4% in May, a drop of $109.6 billion, following a 0.7% rise in April. Disposable personal income declined by 0.6%, reflecting higher tax burdens and slower wage growth. Meanwhile, personal consumption expenditures fell by 0.1%, a $29.3 billion decline that signals households are reducing discretionary spending under tighter financial conditions. The personal saving rate edged up to 4.5%, indicating a cautious stance by consumers amid persistent inflation pressures.

Market Impact: Rates, Dollar, and Equity Futures React

Treasury yields inched higher after the release, with the two-year yield testing recent highs as traders adjusted to the stickier inflation backdrop. The dollar firmed against major pairs, with USD/JPY climbing toward recent resistance as rate differentials remain supportive of the greenback. Equity futures dipped in pre-market trading, with rate-sensitive sectors like tech facing renewed pressure as the data reduces the likelihood of aggressive near-term rate cuts.

Short-Term Outlook: Fed Likely to Stay Cautious

The hotter core PCE print, combined with declining personal income and cautious spending, suggests the Fed will maintain a restrictive stance, delaying potential rate cuts until inflation trends closer to target. Traders should anticipate continued volatility in Treasury and FX markets, with upside risks for yields and the dollar if inflation pressures persist in upcoming prints.