3.4% Inflation. Hike Odds Fell to 37%

Wall Street got a softer inflation print Wednesday. PCE came in at 3.4%. Economists expected 3.7%. October hike odds fell to about 37%. Tech rallied.

But the broader market could not hold the move. The Nasdaq gained 0.24%. The Dow lost 443.87 points. Strong spending and stronger GDP kept long-term yields under pressure.

Wednesday, September 30

Wednesday came down to one split. Inflation came in softer than expected. Growth stayed firm. That pushed October hike odds lower.

But it did not pull long-term rates down enough to lift the whole market. Tech benefited. Most sectors did not. That is why the Nasdaq finished higher while the Dow and S&P 500 fell.

The Fed’s preferred inflation gauge rose 0.3% in August. Economists expected 0.4%. Over the past 12 months, PCE inflation was 3.4%. The forecast was 3.7%.

Core PCE rose just 0.2% for the month. Annual core inflation came in at 3.0%. That was the market-friendly part of the report. Inflation is still well above the Fed’s 2% goal. But the numbers reduced the case for another immediate hike.

Rate traders reacted fast. The chance of another Fed hike in October fell to roughly 37%. That was down from about 51% Tuesday. And near 70% earlier in the week. That is a major shift.

On Monday, another October hike looked likely. By Wednesday, markets were leaning toward a pause. Another move later in the year is still possible. But October is no longer the clear base case.

The same report also showed something the Fed cannot ignore. Consumer spending jumped 0.9%. After inflation, spending still rose 0.6%.

That is strong. Consumers are still buying. The economy is still moving. And demand has not collapsed under high rates and expensive oil. That helps company earnings. It also gives inflation more room to stay firm.

Households spent faster than their income grew. The savings rate fell to 4.1%. That was the lowest level since November 2022. It was 4.6% in July.

Income rose only 0.2%. Real disposable income was flat. That can support growth now. But it is harder to sustain if wages or jobs weaken. That is why the labor data matters so much from here.

Private employers added 90,000 jobs in September. August was revised down to 36,000. That shows hiring has slowed. But it has not stopped.

The labor market is still adding jobs. That gives the Fed more room to wait before easing. It also means one softer inflation report does not automatically change the bigger rate path.

Second-quarter growth was revised up to an annualized 2.2%. Consumer spending helped. Business investment helped. AI infrastructure spending helped.

That matters because the economy is still absorbing high borrowing costs. Treasury yields remain near multi-decade highs. Oil is still above $100. Yet growth is holding up. That is why long-term rates are still difficult to push lower.

Tech was the strongest part of the market again. The Nasdaq gained 0.24%. Technology rose about 0.6%. Microsoft, Apple and Nvidia finished higher. The S&P 500 and Dow did not.

That split tells the story. Lower expected Fed rates helped growth stocks. But firm long-term yields still hurt the broader market. So both happened at once. Tech rose. Most sectors fell.

Nine of the S&P 500’s 11 major sectors finished lower. Declining stocks beat gainers by 1.66 to 1 on the NYSE. The Nasdaq posted 212 new lows against just 54 new highs. That is not broad strength.

The major indexes looked calm. The market underneath them was weaker. Large tech stocks kept the Nasdaq green. Most of the market did not follow.

Oil remained another source of pressure. Brent settled at $103.50. WTI closed at $90.42. Crude had already risen sharply through September.

That matters because lower inflation data is only part of the story. Energy costs are still high. If oil stays elevated, it can push transport and fuel costs higher again. That keeps the Fed cautious.

September ended with a clear divide. The S&P 500 fell 0.45% for the month. The Nasdaq gained 1.86%. The Dow dropped 4.29%.

That tells us what carried the market. Tech. AI. Large growth stocks. The rest had a much harder month.

Wednesday left markets with a short list of hard numbers:

Wednesday gave the Fed better inflation data. But it did not give the Fed a weak economy. PCE came in below forecast.

October hike odds fell to 37%. Then consumer spending jumped 0.9%. GDP was revised higher. Private payrolls increased. The Nasdaq rose 0.24%. The Dow lost 444 points. Inflation came in softer. Growth stayed firm. The market split in two.