The US CPI numbers for Sep, released last week on Oct 10, created a flutter in the markets.

The +2.4% in the CPI wasn’t really the spoiler (this print was, infact, the smallest 12-month increase since Feb 2021). Instead, the cause for that queasiness was the little uptick in the Core CPI (which strips out Food and Energy) ─ up from 3.2% recorded in Aug 2024 to 3.3% in Sep 2024!

And, after nonfarm payrolls grew by 254k in Sep, well ahead of the estimated 150k, that little uptick in Core CPI was the perfect glimmer for the 10yr UST yields as it cemented a run of consecutive daily increases from Oct 1-10 ─ only giving up a sliver of that rise, to close at 4.08% on Oct 11.

Here are the values:

Date Value

Oct 11 – 4.08%

Oct 10 – 4.09%

Oct 9 – 4.06%

Oct 8 – 4.04%

Oct 7 – 4.03%

Oct 4 – 3.98%

Oct 3 – 3.85%

Oct 2 – 3.79%

Oct 1 – 3.74%

Now, if I personify the 10-yr UST yield and ask you to look at it, as it raises a well-earned ─ rising in the face of front-loaded cuts to the short-term rates is no mean feat ─ weekend sundowner at a setting sun, a broad grin splitting its sun-soaked face, a thought cloud hanging over its head, and ask you:

What is most likely to be in that cloud?

Your guess is as good as mine, it’s this: are you sure you have bottled that genie, Mr. Central Banker?

The answer to that question lies in an upcoming data print, perhaps the last critical one for this year ─ the change in the PCE for Sep will be released on Oct 31, 2024!

The PCE prints for May, Jun, Jul and Aug have come in at +2.6%, +2.4%, 2.5% and 2.2%.

This [Sep 2024] is a critical print because while the Core CPI uptick may have created a ripple in the markets, the Fed’s preferred gauge for inflation is the PCE and any uptick in this could create further step ups in the queasiness I referred to earlier.

So, will the Sep PCE number buck the trend?

It may not; and I say this with a fair degree of confidence.

I believe it’s due to the very composition of the PCE.

It’s interesting that the Fed’s shift in choice from the CPI to the PCE only happened in early 2000 after Greenspan’s Fed highlighted ” …the PCE chain type index is constructed from a formula that reflects the changing composition of spending and thereby avoids some of the upward bias associated with the fixed-weight nature of the CPI…” in his monetary policy report to the Congress then. (full extract shown)

Apart from the fact that it’s chain-linked and it better captures changes in the composition of spending, the PCE also includes a broader array of components relative to the CPI. This implies that the additional components [in PCE] are likely to crowd out the larger weights of housing and energy in CPI (housing, for instance, makes up 33% of the CPI basket but only 15% of PCE).

I am admittedly out on a limb when I say this: the PCE print for Sep could come in at 2% or lower.

And if it doesn’t, well, then we know who that cheery soul, cradling a sundowner, is.