US core PCE growth in June slightly exceeded expectations, but analysts say it is not enough to change the expectation of a rate cut in September

According to Zhitong Finance, the measure favored by the Federal Reserve to gauge potential inflation in the United States rose moderately in June, with consumer spending remaining healthy. These signs have encouraged officials who hope to cool inflation without damaging the economy. Data released by the U.S. Bureau of Economic Analysis on Friday showed that the core PCE price index, which excludes volatile food and energy items, rose by 0.2% in June, with a year-on-year increase of 2.6%; market expectations were 0.2% and 2.5%, respectively.

Policymakers closely monitor service sector inflation, which excludes housing and energy and is often more sticky. Data shows that this indicator increased by 0.2% month-on-month for the second consecutive month in June. Housing-related prices rose by 0.3% in June, slightly slower than the 0.4% increase seen in each of the past three months, marking the smallest monthly increase since at least January 2023. Prices of goods fell by 0.2% month-on-month.

The report shows that inflation-adjusted spending on services and goods both increased by 0.2%, falling short of the expected 0.3%; however, the increase in May was revised upwards. Housing and utilities drove the growth in service spending, while cars and entertainment goods boosted the growth in goods spending. Due to relatively strong spending, the savings rate fell to 3.4%, the lowest level since December 2022.

Nevertheless, signs of a cooling labor market are beginning to translate into declining purchasing power. Wages and salaries grew by 0.3% in June, half the pace of the previous month. Personal income increased by only 0.2%, below the expected 0.4%. Adjusted for inflation, disposable income growth slowed to 0.1%.

Robert Frick, corporate economist at the Navy Federal Credit Union, said: "The two words that summarize this report are 'good enough'. Spending is good enough to sustain economic expansion, income is good enough to sustain spending, and personal consumption expenditure inflation is good enough to allow the Federal Reserve to easily make a decision to cut interest rates." Despite the quarterly data released on Thursday showing that past data may have been revised higher, US Treasury yields rose as inflation data met expectations, and stock index futures continued to rise. Friday's report provided some encouraging evidence that the Fed's tightening policy is affecting the economy without causing significant damage.

Cherry Lane Investments analyst Rick Meckler stated that US personal income and spending data for May were both revised to 0.4%, indicating a solid improvement in income and spending, with inflation easing. Therefore, this rather good report further supports the notion of a soft landing. After a tough week, the market has the opportunity to rebound today.

The market generally still expects Fed officials to keep the benchmark interest rate at a 20-year high at next week's meeting, but investors are betting on the first rate cut in September. According to the CME FedWatch Tool, the futures market reflects an 86% probability of a rate cut in September, followed by rate cuts at the November and December FOMC meetings. However, Fed officials have been cautious in their remarks, emphasizing that there is no predetermined policy path and will be guided by data.

Chris Larkin, trading and investment director at Morgan Stanley, said, "Overall, it's been a good week for the Fed. The economy seems to be on a solid footing, and PCE inflation remains stable. However, the likelihood of a rate cut next week remains low. Although there is enough time for the economic situation to change before the September FOMC meeting, the data is already trending in the direction the Fed hopes for."