PCE Data Offers Few Surprises

INTEREST RATE MARKET FUTURES

Futures are relatively flat across the curve as April’s PCE inflation readings offered few surprises. Core PCE (which strips out volatile food and energy prices) was unchanged at +0.1% month-over-month growth, matching estimates. Annualized core PCE grew at a rate of +2.5%, in line with expectations and lower than March’s figure of +2.7%. Monthly headline PCE grew at the same rate as core PCE, while annualized headline PCE grew 2.1%, slightly below expectations of 2.2% and lower than March’s reading of +2.2%.

Despite the cooling, inflation remains above the Fed’s 2% target and reinforces the Fed’s wait-and-see approach as uncertainty in the economy looms and tariff impacts have yet to impact prices.

Worries over a gaping budget deficit and overall trade uncertainty remain in the Treasury market as investors are demanding a higher premium for holding onto longer-term bonds. Most of the selling in the bond market has been at the long end of the curve, driven by concerns of long-term inflation resulting from President Trump’s tariffs and tax cuts.

The Treasury Department is expected to need to increase most of its longer-dated debt auction sizes later this year or next year to finance the government’s growing debt problem. US public debt is around 100% of gross domestic product and projected to rise to 134% over the next decade. Investors are worried that an increase in bond issuance will outpace demand, as recent Treasury auctions have been met with tepid demand, although foreign demand remains stable.

San Francisco Fed President Mary Daly said Thursday that policymakers could still deliver two rate cuts this year, as projected in March, but emphasized that interest rates should remain steady for now to ensure inflation is on track to reach the Fed’s 2% target.

The 10-year Treasury yield is 4.43%, and the 30-year yield is hovering around 4.93%. The spread between the two- and 10-year yields is 48 bps, unchanged from this time Thursday.

STOCK INDEX FUTURES

Index futures dropped lower after President Trump said China had “violated” its trade deal with the US Friday morning. US Treasury Secretary Scott Bessent told Fox News on Thursday that trade talks between the US and China are “a bit stalled,” adding that a call between President Trump and China’s leader Xi Jinping may be needed.

A federal appeals court allowed the president’s sweeping tariffs to temporarily stay in effect, a day after the US Court of International Trade blocked their implementation after deeming the method used to enact them “unlawful.”

Initial weekly jobless claims on Thursday came in higher than expectations, with 240,000 new claims. Higher than estimates of 229,000 and notably higher than last week’s figure of 226,000. Revised US GDP figures showed Q1 GDP shrunk less than previously thought, with a contraction of -0.2%, compared to the initial reading of -0.3%.

Despite the recent volatility, stock valuations are still relatively high by historical standards. Companies in the S&P 500 are trading at 22 times their expected earnings over the next 12 months, as of Friday’s close, versus a 10-year average of 18.7 times. The high price-to-earnings ratio is at odds with the many uncertainties surrounding the economic outlook, primarily the still-unfolding consequences of the Trump administration’s trade policies.

CURRENCY FUTURES

The US dollar index held some strength after April PCE figures came in line with expectations, showing a slight cooling in inflation. Market attention returns to a still uncertain trade outlook and continued worries over the US fiscal outlook.

Euro futures are lower after new data showed prices cooled in Spain, Italy, and France this month, setting up the European Central Bank to reach its inflation target and cut rates. Inflation figures for the Eurozone as a whole are set to be released next week, and the recent data has indicated that inflation may come in below the ECB’s 2% target. The ECB is set to meet next week and is predicted to cut borrowing costs by 25 bps to 2.0%. German retail sales for April fell -1.1% month over month, missing expectations of +0.3% growth.

British pound futures edged lower on dollar strength while the sterling hovers below three-year highs. Improved market sentiment, strong retail sales data, and reduced bets on the Bank of England to cut rates have provided upside strength to the pound in recent days. Inflation in the region remains elevated at 3.5%, higher than the desired level for the Bank of England. Markets are expecting the central bank to hold rates steady at its June meeting.

Australian dollar futures slipped lower on a string of weaker-than-expected economic data. Monthly retail sales for April shrank -0.1%, below expectations of +0.3% growth, while building approvals shrank -5.7% compared to estimates of a +3.1% increase. The data reinforced expectations that the Reserve Bank of Australia will continue to cut rates following last week’s 25 basis point rate cut.

Japanese yen futures edged higher after Tokyo’s core inflation came in stronger than expected. Tokyo CPI increased +3.6% on an annualized basis compared to estimates of +3.5% growth. Industrial production for the country also shrank less than expected, with a contraction of -0.9%, above estimates of -1.4%. On Monday, reports that Japanese authorities may intervene in the bond market by reducing bond issuance put downside pressure on the yen, causing yields to drop sharply.

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