US Stocks Mixed as Soft PCE Inflation Cuts Rate Hike Odds

US equity indexes finished mixed on Wednesday as the likelihood of back-to-back monetary policy tightening in October declined following a softer-than-expected inflation print. The Bureau of Economic Analysis reported that core personal consumption expenditures, or PCE, rose 0.2% in August, missing the 0.3% gain analysts had anticipated. This softness in the core inflation metric reduced market expectations for further interest rate hikes by the Federal Reserve.

The broader economic data painted a mixed picture of consumer activity. While inflation cooled in the core measure, total personal consumption expenditures jumped 0.9% in August, matching expectations and reversing a 0.1% decline in July. Real PCE, which adjusts for inflation, advanced 0.6%, slightly exceeding the expected 0.5% increase. The headline PCE price index grew 0.3% for the month, keeping the year-over-year rate at 3.4%, while the core PCE year-over-year rate remained unchanged at 3.0%.

In the bond market, Treasury yields traded mixed with a distinct divide between short and long maturities. The two-year yield edged lower to 4.89%, pulling back from a 52-week high set on Tuesday. In contrast, longer-term rates climbed sharply. The 10-year yield jumped three basis points to 5.29%, its strongest level since 2007, while the 30-year rate rose 3.9 basis points to 5.63%, its highest since 2002.

Traders reacted to the inflation data by significantly lowering bets on additional tightening. According to the CME FedWatch tool, the probability of the Federal Reserve raising its target rate by 25 basis points in October fell to 35%, down from 51% the previous day and 71% a week earlier. The market now assigns a 65% likelihood that the Fed will hold policy steady in the 3.75% to 4% range after its September increase.

Equity sector performance was uneven, with technology and communication services leading gains in the final hours of trading. All but four peer groups declined across the broader market. Energy prices also moved higher, with the front-month US West Texas Intermediate crude oil contract advancing 1.4% to $90.63 per barrel, and North Sea Brent crude rising 0.9% to $103.53 per barrel.