Note: IBD's report on the monthly PCE data for December released Friday morning is at this link.
The Federal Reserve's key inflation rate stayed tame in the fourth quarter even as U.S. GDP growth slowed much less than expected, Commerce Department data showed Thursday. After the release, which improved the chances of a near-term Fed pivot to rate cuts, the S&P 500 rose solidly, racking up another record closing high.
Primary Fed Inflation Rate
The Federal Reserve's primary inflation gauge, the core PCE (personal consumption expenditures) price index, rose at a 2% annual rate in Q4, matching expectations. It was the second straight quarter of 2% annualized inflation, in line with the Fed's target. That follows increases of 3.7% in Q2 and 5% in Q1.
Actually, on an unrounded basis, core PCE inflation actually eased a touch further in Q4, to a 1.99% annualized rate from 2.04% in Q3.
The upshot is that Friday's PCE data, which will break it out for the month of December, is going to provide some more soothing inflation data.
The headline PCE price index, which includes food and energy prices, rose 1.7% in Q4, down from 2.6% in Q3.
Federal Reserve chair Jerome Powell has placed added importance on core services prices excluding housing as a likely indicator of underlying inflation pressures. That's because labor costs tend to make up a high percentage of costs for services industries from health care, to hospitality to hair cuts. In Q4, nonhousing core services inflation eased to a 3.3% annualized rate from 3.55% in Q3.
GDP Growth
The U.S. economy grew 3.3% in Q4, above forecasts of 2% growth, though slowing from Q3's 4.9% pace.
Real personal consumption expenditures rose 2.8% vs. 2.5% estimates. Real private investment rose 2.1%, including growth of 3.2% in spending on nonresidential structures, 1% on equipment and 2.1% on software and related intellectual property products.
Government spending rose at a 3.3% real rate, down from 5.8% in Q3.
Net exports raised GDP growth rate by 0.4 percentage point.
Initial Jobless Claims
New claims for jobless benefits rose 25,000 to a still-moderate 214,000 in the week through Jan. 20. The four-week moving average of claims fell by 1,500 to 202,250.
Federal Reserve Rate-Cut Odds
After Thursday's data, markets were pricing in 51% odds of a quarter-point Federal Reserve rate cut at the March 20 meeting, up from 41% on Wednesday. Odds of a rate cut by the May 1 meeting improved to 91% from 82%.
For the full-year, markets see strong odds (88%) of at least 1.25 percentage points of rate cuts. There's a 59% chance of a sixth quarter-point cut, which would lower the Fed key policy rate to a range of 3.75% to 4%.
S&P 500, 10-Year Treasury Yield React
After the GDP release, the S&P 500 rose 0.5% in Thursday afternoon stock market action. The S&P 500 rose for the sixth straight session, including a string of multiple all-time closing highs.
The 10-year Treasury yield, which had climbed 28 basis points to 4.18% over the past two weeks, fell to 4.13% after the data.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
