Adjusting to a New Nominal: 3 Things to Know
Core personal consumption expenditures (PCE) data remains sticky and stands at odds with the more dovish members of the FOMC
Of the 176 components of trimmed mean PCE prices, 36% posted one-month annualized gains of 5% or faster in August.
This 36% level is unchanged from that seen in the first half of 2025, is higher than the 32% average share seen in 2024, and compares to the 2017–2019 pre-pandemic average share of 25%.
This is not to say that the dovish members of the FOMC will alter their thinking around the need for future rate cuts. Rather, it reinforces the breadth of views seen in the FOMC’s dot plot.
Additionally, elevated inflation is not just a tariffs and housing story — views espoused by Governor Waller and Governor Miran — when analyzed via the core services PCE prices excluding housing data.
This data, which excludes both goods prices boosted by tariffs and housing services prices, rose 0.3% in August, is running at 3.4% year-over-year, and 3.5% over the last three months.
We remain comfortable with our shorter-than-benchmark duration positioning given the Fed’s inability to pursue rate hikes amidst ongoing labor market concerns, despite sticky inflation.
Market reaction to Fed cut points to near-term reflation potential
Entering the Fed meeting last week, our view centered around the potential for increased inflation expectations and higher yields resulting from an adjustment lower in the policy rate.
Since then, US Treasury yields have moved 15-20bps higher across the curve, solely driven by a move higher in inflation indexed/real yields.
This shift higher in real yields reflects investors requiring more yield compensation due to a higher expected inflation rate in the future.
Market participants were also positioned for a more meaningful rate cutting cycle than Fed official rhetoric suggested this week. Interest rate futures now price one fewer 25bp rate cut by YE’26 when compared to pricing prior to last week’s meeting.
US equities are churning across sectors to reflect the evolving K-shape economy
A sharp rise higher post-April tariff announcement in the revisions of analysts’ forward earnings estimates (analyzed via 3m average ratio of ups vs. downs — see Figure 1) for the US demonstrates investor optimism around company fundamentals in the region.
We see this as largely driven by the mega cap companies contained within sectors such as Technology, Communication Services, and Consumer Discretionary.
These sectors currently make up over 55% of the US market and support our continued preference for US large cap exposure. Related deal announcements in excess of $500bn over the last month alone reflect the durability of the spend within the AI theme and these adjacent industries.
However, shorter-term momentum in upward revisions has moved in favor of real economy exposures that may benefit in a reflation regime from lower rates and US tax bill stimulative effects.
To note, exposures in sectors such as Energy and industries such as Metals & Mining have outperformed the S&P 500 by +2.5% and +4.5%, respectively, since the Fed meeting last week. We are evaluating the durability of these moves for portfolio positioning.