The inflation indicator most favored by the Federal Reserve unexpectedly accelerated, leading to calls in the market for a "pause in interest rate cuts."

According to the Zhitong Finance APP, the inflation indicator most favored by Federal Reserve officials—the core PCE inflation index, which excludes the more volatile food and energy components—recorded its largest monthly increase since April, with the year-on-year increase in core PCE slightly higher than economists' general expectations. This data provides significant support for the Federal Reserve's decision to slow down its rate cuts after unexpectedly cutting rates by 50 basis points last month. Combined with previously released strong retail sales data and ADP employment data, some traders have begun to bet that the Federal Reserve may pause its rate-cutting process in December.

According to the latest data released by the U.S. Bureau of Economic Analysis on Thursday, in September, the so-called core personal consumption expenditures price index (core PCE), which excludes the more volatile food and energy items, rose 0.3% month-on-month and increased by 2.7% year-on-year. Compared to economists' general expectations, the month-on-month increase in core PCE was in line with expectations, but the year-on-year increase was slightly higher than the expected 2.6%.

In contrast, the relatively optimistic PCE data shows that the overall year-on-year increase in PCE in September was only 2.1%, the lowest level since early 2021, which was basically in line with economists' expectations, just slightly above the Federal Reserve's 2% inflation target.

After the latest PCE data report was released, the three major U.S. stock index futures continued to decline, while the yield on the 10-year U.S. Treasury bond turned upward.

This PCE data report before the U.S. election is "mixed"

For American voters eager to understand the economic situation before the presidential election on November 5, the latest PCE data report brings mixed economic news: despite ongoing core inflation pressures, consumers continue to spend, bringing the U.S. economy closer to a "soft landing."

In September, inflation-adjusted real personal consumption expenditures accelerated to a month-on-month growth of 0.4%, slightly higher than the 0.3% generally expected by economists, supported by continued strong growth in personal income. The savings rate unexpectedly fell to 4.6%, the lowest level since 2023.

The PCE data released on Thursday concluded a series of unexpected surprises in major economic reports over the past month, which may indicate that the Federal Reserve could adopt a cautious approach to cutting rates by 25 basis points in the coming months, and may even announce a pause in rate cuts in December. Economists generally expect that after the first rate cut in September, the Federal Reserve will approve a second rate cut at the conclusion of its monetary policy meeting on November 6-7, with an expected cut of 25 basis points.

Details of the September inflation data show that price pressures on goods and services in the U.S. still exist. The latest core services price index, excluding housing and energy, rose by 0.3%. Core goods prices, excluding food and energy, increased by 0.1% Food prices rose 0.4%, exceeding expectations, marking the largest month-on-month increase since the beginning of this year.

The latest consumer spending data indicates that the spending power of American consumers is stronger than expected, particularly in goods consumption, which continues to drive the "consumption expenditure giant" that accounts for 70%-80% of U.S. GDP. Coupled with recent employment data showing that the U.S. labor market remains robust, this suggests that the U.S. economy is very close to a "soft landing," with some economists even stating that the U.S. economy has already achieved a "soft landing."

In September, overall service spending, which constitutes a large portion of household consumption in the U.S., increased by 0.2%. Goods spending rose by 0.7%, as many retailers in the U.S. have already lowered prices to attract consumers.

Before considering inflation factors, overall wages in the U.S. have increased by 0.5% month-on-month for two consecutive months, supporting spending. However, once inflation rates and factors such as declining interest and owner income are taken into account, real disposable income only achieved a growth of 0.1%.

These data are generally consistent with the preliminary GDP forecast for the third quarter released by the U.S. Bureau of Economic Analysis on Wednesday, which shows that U.S. economic growth remains very strong, driven by robust consumer spending and a surge in defense spending.

Another report released by the U.S. Bureau of Labor Statistics on Thursday indicated that employment costs eased in the three months ending in September, with the employment cost index rising by 0.8%, the smallest increase since mid-2021. This more moderate interpretation aligns with Federal Reserve Chairman Jerome Powell's assessment last month that "the labor market is not the core source of inflationary pressures in the U.S."

December "Pause in Rate Cuts" Comes into View

The continuously stronger-than-expected non-farm employment market and resilient consumer spending data have significantly boosted expectations for a "soft landing" of the U.S. economy, but they have also led to a gradual cooling of expectations for Federal Reserve rate cuts. Some economists suggest that strong economic data and unexpectedly rising inflation may prompt the Federal Reserve to pause rate cuts in November or December this year, rather than the continuous cuts that had been anticipated for a long time this year.

Deutsche Bank recently released a report stating that if U.S. core PCE data continues to outperform market expectations, the Federal Reserve's "wait-and-see" approach—i.e., pausing rate cuts—will be fully priced in by the market. Analysts at Deutsche Bank pointed out that U.S. inflation has become more sticky, and the significant easing of downside risks in the labor market will provide the strongest support for the market's expectation of a "pause in rate cuts."

Currently, market confidence in the Federal Reserve continuing its rate cut process in December is gradually weakening, with a group of interest rate futures traders beginning to bet on a "pause in rate cuts" in December, and even a very small number of traders betting that the Federal Reserve will pause rate cuts in November.

The "little non-farm" data that far exceeded expectations—after the release of the ADP employment data, interest rate futures traders generally continued to bet on a 25 basis point rate cut by the Federal Reserve in November. However, some traders have shifted to betting that the Federal Reserve will announce a "pause in rate cuts" in December, and even a smaller number of traders are betting on a pause in rate cuts in November. The CME FedWatch Tool shows that the interest rate futures market continues to bet on a 25 basis point rate cut in November, with a probability as high as 95%, but the probability of no rate cut in November has risen from 0 to 5%. An increasing number of traders are betting that the Federal Reserve will maintain the benchmark interest rate in December. The CME FedWatch Tool indicates that after the release of the much better-than-expected ADP employment data and the latest economic data showing a faster month-on-month increase in core PCE, the probability of the Federal Reserve not cutting rates in December surged from 0 before the ADP data release to over 30%, with the probability briefly approaching 40%