US GDP Revised Higher, Core Inflation Cools; Treasury Yields Remain Elevated

The US economy proved more resilient in the second quarter than initially reported, even as a key inflation measure came in cooler than expected, giving investors a mixed signal on the outlook for Federal Reserve policy.

The Commerce Department revised its estimate of second-quarter gross domestic product growth up by 0.7 percentage points to a 2.2% annualized rate, the Bureau of Economic Analysis said. The upgrade was driven by stronger consumer spending and business investment, with spending revised up to a 3.8% pace from the previously reported 3.4%. Analysts pointed to the artificial intelligence investment boom as a supporting factor, according to reports.

At the same time, the Fed’s preferred inflation gauge — the core Personal Consumption Expenditures price index — rose 0.2% month over month and 3.0% year over year in August, both below economists’ estimates of 0.3% and 3.3%. The headline PCE price index stood at 3.4% annually, unchanged from July after a revision. The second-quarter core PCE reading was also revised lower, to 3.3% from 3.6%.

The softer-than-expected inflation data reduced expectations that the Fed will raise rates again at its October meeting. Market pricing for a 25-basis-point hike dropped to about 35% from roughly 52% on Tuesday, according to several reports. Futures markets showed a similar decline, with one source citing a 37% chance on Wednesday, while another put the figure at 39%.

**Treasury Yields Stay Elevated, Stocks Mixed**

Despite the cooling inflation reading, longer-dated Treasury yields remained near multi-year highs. The 10-year note yield hit 5.30% earlier in the session, a new 19-year high, before settling around 5.23% to 5.27%. Analysts attributed the elevated yields to stronger growth expectations, partly driven by record AI-related capital spending, which they said should deliver productivity gains over time.

“The question investors are asking is whether higher yields will break the equity market,” said Arun Sundaram of CFRA Research, as cited in one report.

Wall Street finished mixed. The S&P 500 fell 0.3% to 7,652, and the Dow Jones Industrial Average lost 0.9% to 50,906, according to one source. The Nasdaq Composite rose 0.2% to 26,861. Both the S&P 500 and Nasdaq recorded their second straight quarterly gains, the Dow saw a quarterly decline.

“The market had been tracing out a bullish formation, meaning the price pattern suggested that any positive catalyst could trigger a move higher and that’s exactly what happened,” said Sam Stovall, chief investment strategist at CFRA Research, as quoted by The Guardian.

**Labor Market and Other Data Support**

Additional data reinforced the picture of a resilient economy. The ADP National Employment Report showed private employers added 90,000 jobs in September, above the expected 75,000. Personal spending rose 0.9% in August, the largest increase in five months. The Chicago PMI surged to 58.8 in September from 47.1, its fastest pace of expansion in four months, well above the consensus estimate of 51.0.

However, personal income grew only 0.2% in August, weaker than the 0.5% expected.

Oil prices rose more than 1% on Wednesday, with WTI crude gaining after Russia announced an extension of its ban on most diesel exports through October. Crude’s rise added to inflation concerns, partially offsetting the favorable inflation data. The gains were limited after JPMorgan Chase said Middle East crude exports have rebounded to about 98% of pre-war levels.

The dollar index ebbed and flowed: It rose 0.09% on Wednesday as T-note yields firmed, then slipped 0.17% in Thursday’s session as rate hike chances dwindled. The yen climbed to a 1.5-week high against the dollar, supported by lower Treasury yields and comments from Japan’s top currency official suggesting possible joint intervention with the US.

Gold rose, with December COMEX gold up 0.59% in Thursday trading, supported by a weaker dollar and lower rate hike odds. Silver settled near flat.

**Global Context: Europe, China**

European markets faced headwinds. Germany’s harmonized consumer price index rose 3.3% year over year in September, the largest increase in 2.75 years, stoking inflation worries. Eurozone inflation and weakening sentiment reinforced concerns about stagflation, according to Forex.com analyst Fawad Razaqzada, as reported. The UK’s second-quarter GDP was revised higher to 0.5% quarter over quarter. European stock indices closed lower.

China reported positive economic news: The manufacturing PMI for September rose to 50.1, and the non-manufacturing PMI climbed to 50.2, slightly above expectations, supporting global growth prospects.

**Outlook**

Fed Governor Lisa Cook, without addressing the specific inflation data, said she is committed to bringing inflation down without harming the labor market, according to one source. Markets are now watching Friday’s official employment report for further clues on the pace of policy tightening. The combination of solid growth, a cooling inflation trend, and still-high yields is likely to keep the debate over the Fed’s next move at the center of market attention.