The PCE Price Index comes in as expected. – The Daily Tearsheet

Vital Statistics:

Stocks are flat ahead of the long weekend. Bonds and MBS are down small.

Personal Incomes rose 0.4% MOM in July, which was in line with Street expectations. Personal Expenditures rose 0.5%, again in line with expectations.

The PCE Price Index (The Fed’s preferred measure of inflation) rose 0.2% MOM and 2.6% YOY. If you exclude food and energy, the index rose 0.3% MOM and 2.9% YOY.

Durable goods inflation increased to 1.1%, while non-durable goods inflation decreased to 0.2%.

Inflation has picked up a touch from Liberation Day, rising about 30 or 40 basis points. But it has not created this huge acceleration back to 6%. At least not yet.

This probably still gives the Fed the green light to cut rates at the September meeting, especially if the jobs report next week is soft again. The Sep Fed Funds futures still see a 87% chance of a rate cut.

Pending Home Sales fell 0.4% MOM in July, according to NAR. This was still a 0.7% YOY increase. “Even with modest improvements in mortgage rates, housing affordability, and inventory, buyers still remain hesitant,” said NAR Chief Economist Lawrence Yun. “Buying a home is often the most expensive purchase people will make in their lives. This means that going under contract is not a decision home buyers make quickly. Instead, people take their time to ensure the timing and home are right for them.”

“Rising mortgage applications for home purchase are an early indicator of more serious buyers in the marketplace, though many have not yet committed to a pending contract. The Federal Reserve signaling that they may enact a lower interest rate policy should steadily enlarge the pool of eligible home buyers in the upcoming months.”

MBS spreads continue to improve. MBS spreads are being defined here as the difference between the 30 year fixed rate mortgage and the 10 year Treasury. MBS traders will note that this isn’t exactly correct, but it is close enough for our purposes. The spread has been narrowing for the past couple of years and currently stands at 230 basis points.

On a historical basis going back 40 years, this is still an elevated level. The pre-pandemic years of ZIRP were much lower, and even the pre GFC levels were lower. We are still around 50-60 basis points above normalcy.