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The United States (US) Federal Reserve’s (Fed’s) preferred measure of inflation, the Personal Consumption Expenditures (PCE) Price Index, returns to the spotlight later today. Traders, policymakers, and analysts alike will dissect the release, not only for what it reveals about the trajectory of consumer prices but also for what it signals about the Fed’s next steps regarding US monetary policy. The timing is delicate. After cutting rates last week, the central bank finds itself balancing the risk of sticky inflation against the growing evidence of stress in the labour market. That tension sets the stage for the PCE numbers to command attention.
Unlike the more familiar Consumer Price Index (CPI), PCE captures a broader slice of household spending. It adjusts for changes in consumer behaviour, reflecting shifts in purchasing patterns when prices rise. Where CPI can sometimes exaggerate the cost of living by failing to account for substitutions, PCE softens that distortion. It also weighs categories differently, giving healthcare and other services more prominence. For the Fed, this methodological breadth offers a cleaner lens through which to judge underlying inflation pressures. Over time, it has proven less volatile and more representative of the economy’s spending habits, which explains why Fed Chair Jerome Powell and his colleagues – other Fed policymakers – pay greater attention to it.
Today’s print will be scrutinised for its “core” measure – the index stripped of food and energy prices. This version exposes the stickier elements of inflation: services, housing, and wages. These are the categories where inflation tends to linger, shaping expectations and influencing future wage negotiations. A softening in core PCE would lend support to the argument that inflation is finally bending towards target. A firmer reading, by contrast, would complicate the Fed’s narrative and force markets to question whether last week’s rate cut was premature.
Powell, in his press conference following the rate cut, leaned heavily on the notion of risk management. His language underscored that the Federal Open Market Committee’s (FOMC’s) decision to cut rates was not a verdict that inflation is conquered, but a hedge against further deterioration in jobs numbers. He described a labour market that has lost some of its earlier dynamism, with weaker hiring momentum and an uptick in unemployment among groups historically more exposed to downturns. That shift in emphasis marks a new phase for this cycle.
Inflation remains above target, but the mandate of maximum employment is starting to demand equal attention. This week, other Fed governors echoed this dual focus. Their speeches carried a blend of caution and pragmatism: recognition that inflation has not fully retreated, tempered by concern that leaving policy too tight risks unnecessary damage to employment. Markets picked up on this tonal adjustment. The pricing of futures now leans toward further easing later in the year, though with significant caveats attached. Investors know that a strong PCE print could tilt the balance back, slowing the pace of cuts or even pausing them altogether.
For markets, the stakes are clear. A softer-than-expected reading would embolden the case for continued easing. Treasury yields would likely slide further, equities could extend gains, and the dollar might surrender some of its recent firmness. Risk assets would feed on the prospect of cheaper capital and less restrictive conditions. A hotter print, by contrast, risks snapping that optimism. Treasury yields would be pushed back up, equities could stall, and the dollar might strengthen as traders recalibrate expectations. The reaction would not be uniform – equities sensitive to growth may still cheer looser conditions – but the overall tone would darken.
The nuance lies in the fact that inflation is no longer the sole driver of policy. Last week’s cut made that explicit. The FOMC acted not because inflation had evaporated but because the cost of waiting to ease policy has grown. Labour cracks are widening, and the Fed judged that standing still would pose a greater risk than nudging rates lower. That recalibration does not mean inflation has been sidelined. It does mean, however, that a single PCE release will be weighed not in isolation but in the context of employment data, hiring surveys, and wage trends. Still, PCE carries symbolic weight.
For years, it has been the anchor of the Fed’s inflation framework. The broader narrative is that the Fed has stepped into an environment with fewer certainties. Inflation is not yet at target, but the labour market no longer carries the resilience it once did. Policy is no longer a one-dimensional fight against prices but a balancing act between two imperfect outcomes.
MARKET MOVES
Bonds
US Treasury yields are firmer this morning, with the 10-year yield holding above 4.17% after two consecutive days of increases. Investors were reluctant to take fresh positions ahead of the release of today’s PCE data. Data earlier in the week painted a picture of resilience: jobless claims dropped by 14,000 to 218,000, well under expectations, suggesting companies remain cautious about cutting staff. Revised gross domestic product (GDP) figures confirmed the US economy expanded at an annualised 3.8% in the second quarter, the US’s strongest growth in nearly two years, powered by household demand. Markets still expect a quarter-point rate cut in October, but short-dated yields climbing faster than the long end reduced the recent trend for steepening.
In the United Kingdom (UK), gilt yields spiked, with the 10-year yield climbing to 4.74%, its highest in three weeks. Political noise added pressure as Manchester Mayor Andy Burnham floated raising £40 billion in new borrowing for housing, sparking parallels with the market turmoil under Liz Truss in 2022. Weak participation in gilt auctions – five-and 30-year sales drew the softest demand in two years – underlined investor concerns. Chancellor of the Exchequer Rachel Reeves will be under pressure at the Labour Party conference to calm markets. Meanwhile, the Bank of England (BoE) remains split: BoE Governor Andrew Bailey favours further easing, while policymaker Megan Greene urged restraint with UK inflation at 3.8%.
German bund yields inched higher, with the 10-year yield at 2.77% on 25 September, 0.02 points above the previous session, and up 0.6 points from a year earlier.
Equities
Futures are steady this morning as investors wait for the PCE inflation print. Market caution follows three straight red days – the Dow fell 0.38%, while the S&P 500 and Nasdaq each lost 0.5%. Stronger data dampened hopes for deeper cuts. Jobless claims fell to 218,000, while second-quarter US GDP was revised up to 3.8%, its best level in nearly two years. Yields climbed, with the 10-year above 4.15%, adding pressure on equities. Nine of the S&P’s eleven sectors closed lower, led by healthcare, consumer discretionary, and materials.
The UK’s FTSE 100 dropped 0.4% as pharmaceutical manufacturer AstraZeneca fell 2.2% and financial services company HSBC lost 1.2%. Global medical supplies and technology company ConvaTec slid 5.6% after the US announced investigations into imports of medical and industrial equipment. Miners were mixed: Rio Tinto rallied 3.5%, Glencore gained 0.6%, while Antofagasta fell 1.7%. Halma added over 1% after raising its revenue outlook. Political noise also played a role, with Manchester Mayor Andy Burnham repeating calls for nationalisation and higher borrowing ahead of Labour’s annual conference.
European stocks followed Wall Street lower, with the STOXX 50 down 0.6% and the STOXX 600 off 0.7%. Strong US data lifted yields, hitting credit-sensitive names. Luxury sports car manufacturer Ferrari, sports apparel company Adidas, multinational automotive corporation Stellantis, and French industrial multinational Saint-Gobain each lost more than 2%. Biotech names slumped after new US national security probes into medical imports: Siemens Healthineers, Sartorius Stedim, and Philips all fell over 3%. Clothing retailer H&M bucked the trend, jumping 9.8% after better-than-expected third-quarter earnings.
Commodities
Crude benchmarks pushed higher heading into this morning, with Brent edging toward $70/barrel – an eight-week high and on course for its best weekly performance since early June. Renewed geopolitical tensions are driving supply anxiety. US President Donald Trump pressed Turkey’s President Tayyip Erdogan to stop purchasing Russian oil, part of a broader strategy to squeeze Moscow’s energy revenues amid the war in Ukraine. At the same time, Ukrainian strikes on Russian energy facilities earlier in the week forced Moscow to tighten export restrictions. Russian Deputy Prime Minister Alexander Novak confirmed that the partial ban on diesel exports will remain in place through year-end, alongside an extension of curbs on gasoline shipments, as refinery outages have created shortages across several fuel products. Still, the rally was capped by the resumption of Kurdish crude exports and fading expectations for aggressive US rate cuts, which limited the demand outlook.
Bullion softened to roughly $3,740/ounce, weighed by a firmer dollar after stronger US data reduced the odds of Fed easing in the near-term. Jobless claims fell, while second-quarter US GDP growth was revised up sharply, underlining resilience in both consumers and businesses. Markets now assign an 85% probability of a cut next month, down from 90% prior to the labour data. Investors are awaiting the PCE release later today for clearer signals. At the same time, safe-haven demand has been underpinned by looming tariff hikes announced by Washington, with duties of 100% on branded pharmaceuticals, 25% on heavy trucks, 50% on cabinetry, and 30% on upholstered furniture set to take effect from 1 October.
Currencies
The US Dollar Index held firm above 98.4, extending its recent winning streak as traders waited for the release of the PCE Index. The greenback drew support from stronger US data: unemployment claims fell by 14,000 to 218,000, beating expectations, while second-quarter GDP was revised up to an annualised 3.8% – its fastest pace in nearly two years, led by robust household spending. Markets still anticipate a quarter-point rate cut in October, but total easing priced for the year slipped to about 39 basis points from 43 earlier in the week. The index is poised for a weekly gain of nearly 1%, its best showing in almost two months.
The euro edged higher to $1.1679/€, up 0.15% yesterday, leaving the common currency 0.3% stronger over the month and more than 4.6% higher year-on-year.
Sterling weakened below $1.335/£, its lowest level in seven weeks, weighed by persistent inflation risks and political noise. Divergent BoE commentary added to uncertainty: Governor Bailey continues to argue for further easing, while policymaker Megan Greene urged caution. Sentiment was further unsettled by Manchester Mayor Andy Burnham’s proposal to borrow £40 billion for housing and to renationalise key services, adding fiscal stress concerns to already weak gilt demand. Stronger US GDP data reinforced dollar strength, compounding the pound’s slide.
*Please note that all information is at the time of writing.
Key indicators:
GBP/USD: 1.3342
GBP/EUR: 1.1424
GBP/ZAR: 23.29
GOLD: $3,740
BRENT CRUDE: $69
Sources: Refinitiv, Bloomberg, LSEG Workspace, Trading Economics and Trading View
Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.
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