Cooler Inflation Overrides a Jobs and GDP Beat, Sending Yields Lower
August core inflation cooled to 3.01%, well below forecasts, sending stock futures higher and yields lower — a surprise strong enough to override an ADP jobs beat and an upward GDP revision, and to shift Fed odds toward holding rates steady in October.
Treasury yields fell and stock futures jumped Wednesday after August inflation came in cooler than forecast, a surprise that overrode a batch of stronger-than-expected jobs and growth data released the same morning.
| Metric | Actual | Estimate | Prior |
|---|---|---|---|
| Core PCE (M/M) | 0.2% | 0.3% | 0.2% (rev. 0.1%) |
| Core PCE (Y/Y) | 3.01% | 3.3% | 3.3% |
| Headline PCE (M/M) | 0.3% | 0.3%–0.4% | 0.2% (rev. 0.1%) |
| Headline PCE (Y/Y) | 3.4% | 3.7% | 3.7% |
| GDP, Q2 third estimate (Q/Q ann.) | 2.2% | 1.5% | 1.5% |
| ADP private payrolls (Sep) | 90,000 | 68,000–70,000 | 36,000 (rev.) |
Markets moved fast on the release
Stock futures jumped immediately after the PCE report, having traded sideways beforehand: Dow futures rose 0.4%, S&P 500 futures rose 0.4%, and Nasdaq 100 futures rose 0.3%. Treasury yields fell in tandem — the 10-year dropped to around 5.20%–5.23% and the 2-year to roughly 4.84%–4.86%, both down from pre-data levels, before the 10-year bounced back toward its earlier level later in the session. The moves reflected a shift in Fed expectations: LSEG pricing now shows the Fed more likely to hold rates than hike at its October meeting.
Inflation cools more than forecast
Core PCE — the Fed's preferred inflation gauge, which strips out food and energy — rose just 0.2% in August, below the 0.3% economists expected, and its year-over-year rate slowed to 3.01% from 3.3%, also below the 3.3% forecast and well under the WSJ consensus, which had looked for a repeat of July's 3.7% headline pace. Headline PCE rose 0.3% for the month, versus estimates that ranged from 0.3% to 0.4% depending on the survey, while the annual rate cooled to 3.4% from 3.7%. Both prior months' readings were also revised down slightly.
The softer print lines up with the message New York Fed President John Williams delivered Tuesday, when he said there's no urgency for another rate hike after September's move and that the Fed has more time to gather data.
Jobs and growth data beat forecasts too — and didn't matter as much
The inflation surprise came alongside data that would normally argue for a more hawkish Fed. ADP said private-sector job creation accelerated sharply in September, with private employers adding 90,000 jobs, beating the roughly 68,000-to-70,000 consensus and up sharply from August's downwardly revised 36,000 — the strongest ADP reading in three months, following a stretch of slowing hiring. Base pay for private-sector workers rose 3.2% year-over-year and gross pay rose 4.7%, according to ADP.
Separately, the BEA's third estimate of second-quarter GDP came in well above both the prior estimate and consensus: 2.2% annualized growth versus 1.5% expected and 1.5% previously reported, driven largely by consumer spending revised up to 3.8% from 3.4%. Inflation within that report was revised down alongside the stronger growth, with the GDP price index at 6.1% versus a 6.4% estimate and prior reading.
Personal income, however, told a softer story: it rose just 0.2% in August, well below the 0.5% expected. Spending held up regardless, rising 0.9% for the month, matching estimates and far above July's revised 0.1% pace.
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