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Briefing.com Summary:
*The equity futures market got a pop following some better than feared PCE Price Index data.
*President Trump announced new tariffs for pharmaceuticals, home furnishings, and heavy trucks.
*Losses for the equity market this week are a function of an ordinary consolidation trade after a big run.
The stock market has encountered some selling pressure this week. That is out of the ordinary for this bull market that has had a mostly one-track mind, but in reality it is totally ordinary after a big run.
There is some profit-taking activity happening, some month-end and quarter-end rebalancing, and some understandable hesitation among buyers getting taxed with reports (much like the Market View update we posted yesterday) calling attention to the rich valuations at which the stock market is trading.
In case you missed that update, the market cap-weighted S&P 500 is trading at, or near, its richest point over the last 25 years, which has the dot-com boom and bust as one of its bookends.
So, this morning, ahead of the release of the August Personal Income and Spending Report at 8:30 a.m. ET, there wasn't a great deal of conviction behind the equity futures trade.
The main reason is that participants recognized that the report holds market-moving potential since it factors directly into the outlook for growth, inflation, and the Fed's policy path. The other reason is that some tariff dust was kicked up by President Trump, who announced that there will be new tariffs starting October 1.
Specifically, there will be a 100% tariff on imported branded and generic pharmaceuticals unless a company is building a manufacturing plant in the U.S., a 50% tariff on kitchen cabinets, bathroom vanities and associated products, a 30% tariff on upholstered furniture, and a 25% tariff on heavy trucks.
This news was taken in stride for the most part, causing some industry-specific movement but nothing noticeable at the index level. The noticeable move came after the better-than-feared Personal Income and Spending Report.
Currently, the S&P 500 futures are up 21 points and are trading 0.3% above fair value, the Nasdaq 100 futures are up 63 points and are trading 0.2% above fair value, and the Dow Jones Industrial Average futures are up 204 points and are trading 0.4% above fair value.
Personal income increased 0.4% month-over-month in August (Briefing.com consensus: 0.3%) following a 0.4% increase in July. Personal spending jumped 0.6% month-over-month (Briefing.com consensus: 0.4%) following a 0.5% increase in July. The PCE Price Index was up 0.3% month-over-month, as expected, and the core PCE Price Index, which excludes food and energy, was up 0.2%, also as expected.
On a year-over-year basis, the PCE Price Index was up 2.7%, versus 2.6% in July, and the core PCE Price Index was up 2.9%, unchanged from July.
The key takeaway from the report is the lack of headline surprise for the inflation prints. That helped calm some of the market's angst about tariff pass-through being more demonstrable; therefore, it was better than feared, which qualifies in a relative sense as being good. The solid income and spending results were a bonus, befitting an economy that is still on a growth trajectory.
The latter points notwithstanding, this wasn't an unequivocally good inflation report. We are still talking about core PCE running at 2.9%, which is well above the Fed's 2% target. In April it stood at 2.6%. The Treasury market knows this.
Although the equity futures got a pop after the release, the inflation-sensitive 10-yr note yield remains unchanged at 4.17%, and the probability of a second 25-basis-point rate cut to 3.50-3.75% at the December FOMC meeting slipped to 61.1% from 63.6% shortly before the report, according to the CME FedWatch Tool.
The question now is, will the equity market retain its positive bias or succumb to another rollover trade as part of an ongoing and ordinary consolidation trade?
