The US Bureau of Economic Analysis released its personal consumption expenditure price index report for August, which showed that price pressures were lower than economists had expected but remained elevated. Combined with an upward revision to second-quarter economic growth and a strong manufacturing report, the data is pushing US government bond yields higher. On top of that, a
rising government deficit is contributing to the recent sell off in government
bonds and pushing yields higher.

The PCE, which is the U.S. Federal Reserve Board’s (Fed) preferred inflation gauge, rose by 3.4% year-over-year in August, unchanged from July but below the 3.7% expected. Core PCE, which excludes food and energy, rose by 3.0%. Consumers kept spending too, with personal income up 0.2% and personal spending increasing by 0.9% in August.
Meanwhile, second-quarter growth was revised higher.  A third and final estimate showed the U.S. economy expanded at an annualized pace of 2.2%, reflecting stronger consumer spending and business investment. Conversely, a decline in net trade weighed on overall growth.
Manufacturing activity kept expanding in September. The S&P Global US Manufacturing Purchasing Managers Index rose to 55.9 in September, its highest level since May 2022. The
sector benefited from robust new orders and output. However, price pressures continued to worsen.
Still elevated inflation,  and expectations that the Fed will raise interest rates again have pushed US
government bond yields higher. Yesterday, the 10-year US Treasury yield briefly
touched its highest level since 2002.

The combination of data suggests the US economy remains on solid footing, which is good news for economic growth but complicates the inflation picture. Rising bond yields mean higher borrowing costs across the economy, from mortgages to corporate debt, and are worth watching closely in the weeks ahead. The Fed will make its next interest rate announcement on October 28.

If you would like to discuss this economic and market update or have questions about your finances and investments, please feel free to contact me anytime.