Dollar Slides, Stocks Mixed as Cooler US Inflation Data Eases Fed Rate Hike Pressure

The dollar weakened and market expectations for a Federal Reserve rate hike next month tumbled on Wednesday after US inflation data came in softer than forecast, with the core Personal Consumption Expenditures (PCE) price index rising less than anticipated in August and a key quarterly measure revised lower.

Data from the Commerce Department showed the August core PCE price index, the Fed's preferred inflation gauge, rose 0.2% month-over-month and 3.0% year-over-year, weaker than the 0.3% month-over-month and 3.3% year-over-year economists polled by Reuters had expected. Separately, the second-quarter core PCE price index was revised downward to an annualized 3.3% from the previously reported 3.6%.

The probability of a 25-basis-point rate hike at the Fed's October 27-28 meeting dropped to 35%, according to multiple reports, down from 52% on Tuesday. The Detroit News, citing CME's FedWatch Tool, put the estimate at roughly 39%.

**Market Moves**

The dollar index (DXY00) fell 0.17%, according to Nasdaq data, as the reduced odds of tightening weighed on the currency. EUR/USD rose 0.19%. The yen strengthened 0.27% against the dollar, hitting a 1.5-week high, supported by the weaker greenback and lower Treasury yields.

US stock markets delivered mixed results. The S&P 500 ended the session down 0.23% or 0.25%, per separate reports, closing at 7,652.71 points. The Dow Jones Industrial Average fell 0.84% or 0.86% to 50,918.08. The Nasdaq Composite rose 0.24% or 0.25% to 26,864.00. Both the S&P 500 and the Nasdaq notched their second straight quarterly gains, according to the Detroit News.

Precious metals gained. December COMEX gold futures rose 0.59% and December silver futures gained 0.02%, buoyed by the weaker dollar and reduced Fed rate hike expectations, as reported by Nasdaq.

**Economic Data Underpins Growth Concerns**

The softer inflation data was accompanied by signs of underlying economic strength. Second-quarter GDP was revised upward to an annualized growth rate of 2.2%, stronger than forecasts of no change at 1.5%, Reuters and other outlets reported. Personal consumption for the quarter was revised up to 3.8% from 3.4%.

The labor market also showed resilience. The ADP National Employment Report showed private employers added 90,000 jobs in September, above the 75,000 expected and up sharply from a downwardly revised 36,000 in August. August personal spending rose 0.9% month-over-month, the largest increase in five months, matching expectations. However, personal income rose only 0.2%, missing the 0.5% forecast.

The September MNI Chicago PMI surged 11.7 points to 58.8, well above the 51.0 estimate and marking the fastest pace of expansion in four months.

**Oil and Yields Limit Gains**

A rise in crude oil prices tempered some of the market's enthusiasm. WTI crude futures rose more than 1% after Russia announced it would extend a ban on most diesel exports through October, tightening global supply. The Wall Street Journal contributed reporting on oil. Higher oil prices raise inflation expectations, which could keep pressure on central banks.

The yield on the 10-year US Treasury note held steady or edged higher, reaching 5.246% to 5.268%, according to various sources. The Detroit News noted that though the 2-year yield initially eased after the inflation data, longer-dated yields continued to climb on expectations for solid economic growth.

Fed Governor Lisa Cook said she is committed to bringing inflation down without harming the labor market, as price pressures have been too high for too long, the Detroit News reported. She did not directly address the softer-than-expected inflation data.

**Analyst Views**

"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," Sam Stovall, chief investment strategist at CFRA Research, told the Guardian.

"The market is focused on is, is the economy continuing to grow and can it manage those higher interest rates? And I would say so far, the market has looked kind of like history that when the economy is growing, when profits are strong, when there's a secular theme, it will look past higher interest rates," said Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan, as quoted by the Detroit News. However, he warned that persistently elevated rates could eventually damage bond portfolios and limit credit.

**Other Moves**

Overseas, Japan's Nikkei 225 closed up 1.94%, while China's Shanghai Composite gained 0.318%. The Euro Stoxx 50 fell 0.36%. In currency markets, the yen strengthened on weaker US inflation and on carryover support from comments by Japan's top currency official, Atsushi Mimura, who Reuters reported said Japan and the US had sent a "very clear" message about the yen's depreciation.

Mortgage rates climbed higher, with the average 30-year fixed rate rising 18 basis points to 7.30%, a 2.75-year high, according to MBA data cited by Nasdaq. Mortgage applications fell 6.0% in the week ended September 25.