U.S. stocks opened slightly higher on Friday after the Federal Reserve's preferred inflation data showed a year-over-year increase of 2.2%, coming in below expectations. This indicates that inflation pressures are easing and the economy is cooling. The market anticipates these figures will prompt the Fed to continue cutting interest rates in the coming months.
The Dow Jones Industrial Average rose 79.22 points, or 0.19%, to 42,254.33 points; the Nasdaq Composite Index gained 39.91 points, or 0.22%, to 18,230.20 points; and the S&P 500 Index added 10.01 points, or 0.17%, to 5,755.38 points.
On Friday morning, the market focused on the August Personal Consumption Expenditures (PCE) Price Index. The index indicated continued moderation in inflation pressures. According to the U.S. Bureau of Economic Analysis, the PCE Price Index rose 0.1% month-over-month and 2.2% year-over-year, below the expected 2.3% year-over-year increase. In July, the PCE index had increased 0.2% month-over-month and 2.5% year-over-year.
Excluding food and energy, the core PCE Price Index was up 0.1% month-over-month in August, compared to 0.2% in July. The core PCE Price Index rose 2.7% year-over-year, aligning with market expectations.
The report also revealed that U.S. personal income increased by 0.2% month-over-month in August, below the expected 0.4%. Real personal consumption expenditures rose by 0.1% month-over-month, matching expectations.
The so-called core personal consumption expenditures index, which excludes volatile food and energy categories, increased by 0.1% from July. Adjusted for inflation, spending also grew by 0.1%. Nominal personal income climbed by 0.2%, while the savings rate dropped to 4.8%.
Analysts noted that the slight rise in core inflation and consumer spending lines up with the Fed's assessment that the economy is cooling down.
According to Forexlive, the unrounded monthly rate of the core PCE Price Index for August was 0.1304%, slightly below the 0.14% noted by Fed Governor Waller. The income and expenditure data, showing a slight weakness, should reassure the market that the economy is indeed cooling.
Renowned financial journalist Nick Timiraos commented that the Fed's preferred PCE indicator is close to its target. He stated that over the 12 months ending in August, the PCE index rose 2.2%, nearing the Fed's 2% target.
Following the release of the PCE data, the market expects the Fed to continue cutting interest rates in the coming months. According to the CME FedWatch Tool, the probability of a 25-basis point cut by November is 45.9%, while a 50-basis point cut is seen as 54.1%. For December, the tool predicts a 24.0% chance of a cumulative 50-basis point cut and a 50.2% chance of a cumulative 75-basis point cut.
Another report released on Friday showed that the U.S. goods trade deficit narrowed to $94.3 billion in August, better than the expected $100.2 billion. The preliminary goods trade deficit for August exceeded economists' expectations, narrowing from a revised $102.8 billion in July to $94.3 billion. Economists had forecasted a deficit range between $105 billion and $97.2 billion.
Recent economic data has bolstered investor confidence in the strength of the U.S. economy. The previous week's initial jobless claims decreased more than expected, indicating a robust labor market, while the final estimate of the second-quarter GDP was 3%.
LPL Financial Chief Economist Jeffrey Roach stated, "The market is pleased that the Fed is aggressively readjusting its policies."
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