Sticky PCE and the Fed Cut Debate

Grant Calloway

That bell's about to ring in a few minutes, and let me tell you, this tape's tighter than a drum this morning. Welcome in, everybody. Grant Calloway here, sitting in front of the screens, watching the premarket order flow trickle in. And, uh, well, the futures are opening pretty cautious today. We got the Federal Reserve's preferred inflation gauge hitting the tape, and it is giving cross asset traders plenty to chew on before the open. CNBC reported earlier that July Core PCE, stripping out food and energy, increased zero point two percent for the month and three point three percent on an annual basis. Now, those numbers were right in line with forecasts, but, uh, but the broad takeaway here is that inflation is just being plain stubborn. It is not crashing down to that two percent target the Fed keeps talking about. And as a result, Treasury yields ticked higher right after the report came out. The ten year yield is edging up again, digesting what this means for interest rates. Meanwhile, over in commodities, WTI crude oil is holding steady right near eighty one dollars per barrel due to ongoing supply concerns, and the US Dollar Index, the DXY, is creeping up toward one hundred three point eight.

Grant Calloway

Now, when you look past the macro numbers and start peeling back the onion on individual equities, you see some real sector dispersion out there this morning. Not everything is moving in lockstep, especially outside of tech. Industrial heavyweight Caterpillar is dipping about zero point eight percent in premarket trading on some global machinery order softness. On the flip side, energy producer ConocoPhillips is up one point two percent, benefiting from those firm crude realizations. And over in financials, the regional banking ETF, ticker KBE, is slipping roughly zero point five percent. Why? Well, because expectations of a flatter yield curve are squeezing the net interest margin outlook for those regional lenders. It, it, it is a classic premarket split, the kind of texture you love to see if you are hunting for mispriced setups in the wreckage.

Grant Calloway

Before we break down what this means for the Fed's next move, a quick word on how I sort through all this morning noise. If you are trying to cut through the mountain of data releases, premarket movers, and yield ticks every morning, check out Jellypod at jellypod.com. It is a fantastic daily audio tool that turns raw market clutter into clear, actionable morning intelligence right before the opening bell hits. I use it to get dialed in fast, and you can check it out over at jellypod.com.

Grant Calloway

Alright, so let us get into the real debate hanging over the floor today. What does this inflation print actually mean for the Fed's rate cut path when they meet in September? You have got two very distinct camps forming on the desk right now. The bulls are looking at that zero point two percent monthly core number and saying, look, uh, annualized over the last few months, that works out to about a two point four percent run rate. That is mighty close to target. To the bull camp, this proves the soft landing trajectory is still completely intact. They argue it gives Chairman Warsh and the Open Market Committee all the justification they need to deliver a smooth twenty five basis point rate cut in September without worrying about triggering some kind of secondary wage price spiral. It is the gradual easing cycle the equity bulls have been praying for all summer.

Grant Calloway

But, uh, but then you talk to the bears. And I have got to say, the bear case has some real teeth here. The bears look at that three point three percent year over year core PCE figure and they see a sticky, persistent problem in service sector inflation. Three point three percent is still uncomfortably far above the Fed's two percent target. And if inflation stalls out at these levels, the Fed cannot cut rates nearly as aggressively as equity valuations are pricing in. Stock multiples are pretty darn rich right now, and if borrowing costs stay higher for longer, those rich valuations become very vulnerable to corporate margin compression. If the Fed's easing cycle turns out to be shallow, a lot of stock prices are going to have to recalibrate down to earth.

Grant Calloway

Watching this tape unfold takes me right back to the mid nineteen nineties on the floor of the New York Stock Exchange. Back during the Fed's soft landings in ninety five and ninety six, we would see these exact same tight, cautious premarket tapes late in the summer. Everybody on the floor would be whispering that institutions were dumping stock ahead of the data. But when you looked at the specialist books, it was not outright liquidation at all. It was just institutional hedging. Smart money was buying put protection and tightening their risk parameters while waiting for clarity from central bankers. That quiet, tight tape ahead of a Fed meeting isn't panic. It is just big money putting on its seatbelt before the turn.

Grant Calloway

Looking ahead at the rest of the session today, keep your eyes on the clock at ten o'clock Eastern time when we get the latest consumer sentiment data. That report will give us a fresh look at inflation expectations and consumer appetite. We also have a couple of Fed officials scheduled to speak throughout the day, and every word they say about September will be scrutinized under a microscope. So keep your head on a swivel, respect your risk limits, and remember what we used to say on the trading floor: the tape does not care about your feelings, it only cares about your order flow. That is going to do it for me today. Just a quick reminder before I let you go, this episode is strictly for educational and informational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. Have a great trading day, everybody. Catch you next time.