Investors may be approaching “peak good news” on inflation, but sustaining that progress may require the Fed to remain tighter for longer.
Headline PCE inflation rose 0.3% in August and 3.4% year over year, while core PCE increased 0.2% and 3.0%, respectively. Both readings were softer than expected, while the 42 Macro PCE Deflator Breadth Models showed early signs that inflation pressures are narrowing.
However, the 10-year Treasury yield climbed to approximately 5.28%, while the 30-year reached 5.62%, continuing to add pressure on stocks and reinforcing the Fed’s need to maintain credibility with the bond market.
In our view, the FOMC must continue to tighten cyclically to create room to ease more aggressively later, what we call “Play-Action Pass to Set Up the Run.” If policymakers follow that path, our models suggest they may be able to take a victory lap on inflation next year.
As inflation, bond yields, and labor demand send competing signals, 42 Macro’s systematic process helps investors identify meaningful changes in market conditions and adjust portfolio risk accordingly.
Explore 42 Macro research solutions for a simple and systematic risk management process.
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