The Stock Market Climbs for the Third Straight Day as the Fed's Preferred Inflation Gauge Eases to Its Lowest Level in Two Years

U.S. stock markets commenced the trading day on a positive note, poised for a third consecutive day of gains. This upswing came in response to a notable development in the realm of inflation, a key concern for investors. The chosen inflation metric, favored by the Federal Reserve, indicated a slowdown in price pressures to their most sluggish pace in two years. This positive signal arrived as a welcomed relief to the market, especially at the conclusion of a challenging September.

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Here's the market snapshot:

• The Dow Jones Industrial Average (DJIA) advanced by 100 points, equating to a 0.3% increase, reaching 33,762.
• The S&P 500 (SPX) recorded a gain of 25 points, or 0.6%, settling at 4,324.
• The Nasdaq Composite (COMP) exhibited notable growth, surging by 144 points, or 1.1%, to attain 13,343.

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In the preceding trading session, on Thursday, market performance saw the Dow Jones Industrial Average rising by 116 points (0.35%) to reach 33,666, the S&P 500 posted an increase of 25 points (0.59%) to achieve 4,300, while the Nasdaq Composite gained 108 points (0.83%) to close at 13,201.

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The impetus for these market dynamics stemmed from the publication of core inflation data derived from the PCE (Personal Consumption Expenditures) price index. In August, this index showed a modest 0.1% rise, falling short of the 0.2% increase forecasted by economists. Consequently, the year-over-year core price inflation, which excludes volatile components such as food and energy prices, expanded at a rate of just 3.9%, marking the slowest 12-month pace in two years. The Federal Reserve places particular emphasis on core inflation rates, viewing them as more reliable indicators of long-term inflation trends.

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Nevertheless, it's noteworthy that the headline PCE index, which encompasses all price components, including energy, exhibited a more substantial increase of 0.4% in August, marking the largest monthly upswing in seven months.

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While investors welcomed the encouraging core PCE report, financial experts cautioned that it might not deter the Federal Reserve from implementing another interest-rate hike later this year. Stock markets have experienced declines since the Fed's recent announcement that it intends to maintain its policy rate above 5% for a longer duration than initially anticipated.

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Carol Schleif, Chief Investment Officer at BMO Family Office, remarked, "Friday’s PCE on a core basis, which removes food and energy prices, suggests that inflation is continuing to decelerate, meaning the Fed’s aggressive campaign is working. The challenge is that core PCE remains almost double the Fed’s 2% target, prompting the Fed to keep the possibility of another rate hike in play."

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U.S. Investment Strategist at eToro, Callie Cox, highlighted the moderation in services inflation, which increased by 4.9% in August compared to the previous year. She stated, "Services inflation is cooling off, too, which is what Powell and the Fed want to see as they near the end of rate hikes. Altogether, this report should bring bond yields back down to earth."

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Beyond the inflation data, the report also revealed a 0.4% rise in personal income, driven by increases in private wages, salaries, and higher interest income.

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Investors also kept an eye on the Chicago Business Barometer, also known as the Chicago PMI, which registered at 44.1 in September, marking its first decline in three months. Additionally, the University of Michigan consumer sentiment index was due to be released later on Friday.

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Despite the S&P 500's three-day ascent, it remains on course to conclude the month with a loss of approximately 5%. This is primarily attributed to the rise in long-term bond yields and the strength of the U.S. dollar, factors that have exerted significant pressure on stocks. However, the S&P 500 and Nasdaq are currently on track to record weekly gains, breaking a three-week streak of losses, according to FactSet data.

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In recent trade, the yield on the 10-year Treasury note was down by 4 basis points, resting at 4.530%. Nevertheless, it remained close to the 16-year highs attained earlier in the week. It's essential to note that bond yields move inversely to bond prices, further influencing market dynamics.

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